Centerra Gold Inc. (CGAU) Q4 2014 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Centerra Gold 2014 Fourth Quarter and Year-End 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, Friday, February 20, 2015. I would now like to turn the conference over to Mr. John Pearson, Vice President, Investor Relations. Please go ahead, sir.

Thank you, Carlos. Welcome everyone to Centerra Gold 2014 fourth quarter and year-end conference call. Today's call is open to all members of the investment community and to the media in listen-only mode at first. After our formal remarks, we will open the phone to question. The operator will give the instructions for asking a question. 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; Gordon Reid, Chief Operating Officer; Jeff Parr, Chief Financial Officer; and Ron Burk, Vice President, 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 and the MD&A. For a more detailed discussion of the material assumption, risks and uncertainties please refer to our news release issued last night, the MD&A along with the audited financial statements and notes and to our other filings, which all can be found on SEDAR and on the company's website. And now, I'll turn the call over to Ian.

Thank you, John, and good morning everyone. So far we've had a busy start to the year. Our Gatsuurt project was designated as a mineral deposit of strategic importance, and this paves the way for the development of the project. So we look forward now to working with the Mongolian government to settle the terms of the state participation and we expect that this will be resolved in the next few months. We also announced the signing of a definitive agreement with Premier Gold Mines to form a 50:50 for joint ownership and development of the Hardrock Gold Project on the Trans-Canada property which is located up in Geraldton-Beardmore Greenstone Belt in Northwestern Ontario. And I will talk a little more about that later. Talking of the results in 2014, once again, we achieved in our full-year guidance both gold production and unit costs. We expanded the Öksüt measured and indicated resources to an estimated 1.4 million contained ounces of gold, and we converted the majority of the previously reported indicated resources to measured resources. We're also continuing now to work in completing the environmental and social impact assessment for the project and the feasibility study and we expect to have this work done by the middle of this year. We now have three advanced development projects that can deliver strong production growth for us at low cost, and they also provide operational and geographic diversification. We confirm these to ourselves from our balance sheet or to find an ore through financing and we've already had some preliminary discussions with a number of financial institutions about this. So just now looking at the financial front, we reported a net loss in the fourth quarter of $11 million or $0.05 per share. This includes the $111 million or $0.47 per share non-cash impairment charge or goodwill. After reflecting the impairment, our full-year net loss was $44 million or $0.19 per share. Cash provided by operations in 2014 totaled $376 million or $1.59 per share and the company ended the year with a solid balance sheet as our cash and short-term investments grew to $562 million or $486 million net of debt. During the year, we also extended our $150 million revolving credit facility with EBRD for another year. And this will provide us with additional liquidity going forward. Regarding our negotiations with the government of Kyrgyz Republic, we're continuing to work with the Kyrgyz government, Kyrgyzaltyn, and their advisors to restructure the Kumtor Project in accordance with the heads of agreement that we signed in 2014. And we're now in the process of negotiating the definitive agreements. As we've indicated in our news 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. In the meantime, maintaining continuous mining operations at Kumtor remains a priority for both ourselves and for the government. Like last year, we are continuing our discussions with the Kyrgyz government and the applicable state agencies to obtain the relevant approvals and permits for operation in 2015. As we stated in our news release, we believe our existing agreements with the Kyrgyz Republic in our view entitle us to all the necessary permits. We provided an update on our reserves and resources on February 9. Once again, this year, we've used a gold price of $1,300 to estimate our reserves. And after processing 776,000 contained ounces in 2014, our proven and probable reserves total now is estimated at 7.7 million ounces of contained gold. This reflects a decrease of 1.65 million contained ounces and substantially all of this can be attributed to the decrease in reserves at Kumtor, after reflecting the negative reconciliation, a new resource model and the new pick design. At Kumtor, proven and probable reserves total an estimated 6.1 million contained ounces of gold. And that's after accounting for processing 731,000 ounces of gold in 2014 and then a reduction of 1.6 million ounce of contained ounces. At the end of last year, and end of December 2014, we started work on the new Central Pit resource model and that was to account the negative block model reconciliation that we had experienced during the year. This came primarily in the fourth quarter. The net impact of the new resource model was to decrease the reserves by approximately 590,000 contained ounces. In addition to this change, the mine design was revised, as a result of the new resource model, and also to include, flattening of certain pit slopes that was required to mitigate geotechnical concerns. The new mine design has resulted in a decrease in probable reserves of 743,000 contained ounces. If you probably recall, during 2014, we have to build a buttress to limit the movement in the South Arm of the Davidov Glacier. The location of the buttress has impacted the ultimate pit wall boundary of the Central Pit, and so is resulted in a decrease of probable reserves by an additional 358,000 contained ounces. So those cumulatively have had a significant impact on the Central Pit reserves. In addition to this, we completed optimization of the Sarytor and Southwest open pits, which resulted in an increase of Sarytor of about 147,000 contained ounces, and a decrease on the Southwest Pit of probable reserves of 105,000 contained ounces. At Boroo, all the remaining reserves in the stockpiles actually were processed in 2014. The Boroo mill was closed in December, and is now being put on current maintenance. So the Boroo operation will continue to recover gold in 2015 from the heap leach bed. Reserves and resources at Gatsuurt were unchanged at an estimated 1.6 million contained ounces of reserves and 398,000 contained ounces of indicated resources. So now, turning to the Trans-Canada project. We're very excited about this new partnership with Premier Gold. It gives us an exposure to a significant gold resource and an advanced stage development project in Northwestern Ontario. The property is a large land package; with some excellent exploration potential, and the extra existing mineral reserves itself has already had an extensive amount of drilling done on it. We have struck to the deal with Premier to maximize the funds that we are investing for the benefit of our shareholders, a significant portion of the funds going to advancing the project. Upon closing, we see the 50% share in the partnership, which is an upfront payment to Premier of only $85 million Canadian. Following that, we then invest $185 million of which half is -- or $92.5 million is on behalf of Premier, and this goes into advancing the project. A portion of this amount at the start will be used to complete some additional drilling, mineral resource update, and the feasibility study. And then the remainder of the funds will be used towards the construction and development of the project itself and that's a subject of the satisfaction of certain feasibility criteria and other project advancement criteria. So after Centerra has contributed additional $92.5 million, for a total of this investment of $185 million in development of the project. Further funding of the project will then be on 50:50 basis. We will be completing additional drilling this year and this will be used to update the resource estimation that will be completed later this year. That resource update will also incorporate the 35,000 meters of drilling that was completed by Premier late last year. The results of this drilling, and the revised resource estimation, show an increase in the contained ounces within the Hardrock project pit as is defined in the technical report Premier published in Öksüt of last year, and Premier would receive a contingent payment of up to $36 depending on the number of ounces added. So you can see the terms of the agreement has a significant portion of the purchase price to be spent for the development and construction of the project, and it allows Premier to benefit from an additional payment, if the partner has significantly increased the value of the project by finding more gold. Premier has an experienced project team in place, so we can move forward with this work very quickly. The project also provides us with an opportunity to shelter some of the income from the project going forward by using the current and future tax credits that we already have here in Ontario. So with that, I will now turn it over to Gordon. He can talk about the operations.

Thanks, Ian. Both our operations performed well during the quarter, and as Ian mentioned, we met our annual guidance for both gold production and unit costs. At Kumtor, the operation had a good quarter, as we mine the high grade SB Zone ore and cutback 16, producing almost 292,000 ounces of gold. For the full-year, Kumtor produced 567,693 ounces of gold at an all-in sustaining cost of $779 per ounce sold which includes capitalized stripping and sustaining capital. The all-in cost which includes growth capital as well, but excludes revenue based tax, was $851 per ounce sold for the year. In 2015, we estimate that the Kumtor mine will produce between 470,000 and 520,000 ounces of gold, with a relatively even production profile quarter-over-quarter. Kumtor is expecting all-in cost for 2015 to be in the range of $869 to $963 per ounce sold. As Ian mentioned, we have a new mine plan for Kumtor based on the new resource estimation, the impact of the buttress, and changes to certain pit slopes. This new life of mine plan is currently being optimized and will reflect the deferral of capital related to mine haulage equipment and the cancellation of the mill expansion, both of which were discussed in the December 2012 technical report. A new technical report is expected to be filed on SEDAR by March 26, and will reflect an updated production profile, and updated operating and capital costs from those that were disclosed in the 2012 technical report. In addition, Kumtor has experienced difficulty in achieving the gold recoveries published in the December 2012 technical report, which assumed a life of mine gold recovery rate of 81%. It is now estimated that going forward the average life of mine gold recovery will be 77%. This provides estimate would be reflected in the new life of mine production profile in the updated technical report. Work continues at Kumtor on implementing strategies to improve gold recoveries. Ore performed well during the quarter and for the year producing 53,128 ounces of gold which exceeded our guidance. In late December, following the completion of milling of all of the stockpiled ore, and the subsequent third-party thought processing arrangement, the Boroo mill was transitioned to care and maintenance. It is anticipated that transition activities at the mill will be completed by the end of February after which the mill would be kept on standby awaiting the start-up of the Gatsuurt project. This year, we estimate that Boroo will produce between 10,000 and 15,000 ounces of gold from the secondary leaching of the heap leach pad and from mill cleanup. Boroo will be cash flow positive in 2015. I will now turn it over to Jeff to talk about our financials.

Thanks, Gordon. Good morning everyone. On a consolidated basis our fourth quarter revenue of $360 million, reflects 19% pure ounces sold compared to the same quarter last year. Our average realized gold price was 11.99 or 6% lower than the 12.71 an ounce achieved in the fourth quarter of 2013. During the quarter, we posted a net loss of $11 million or $0.05 a share, after reflecting the $111 million non-cash impairment charge for goodwill related to the Kyrgyz cash generating unit, primarily resulting from the decrease in reserves and resources at Kumtor. Also, as expected, Kumtor reversed the $12 million inventory impairment recorded previously as we mine significantly more ounces in the fourth quarter. For the full-year we recorded a net loss of $44 million or $0.19 a share, reflecting a non-cash impairment charge of $111 million or $0.47 a share for goodwill related to the Kyrgyz cash generating unit. It also reflects fewer ounces produced and sold, and lower realized gold price of 12.41 an ounce compared to 13.55 an ounce last year, and higher share-based compensation. This was partially offset by lower cost and lower exploration spending. In 2015, our outlook for capital expenditures is $76 million, which includes $50 million of sustaining capital, but excludes capitalized stripping of $185 million. Growth capital is expected to be $26 million, which is all at Kumtor primarily for the infrastructure relocation. Importantly, the company continues to generate good cash flow, with cash provided by operations of $217 million or $0.92 a share in the quarter, and as Ian mentioned, $376 million or $1.59 a share for the year. Centerra continues to focus on optimizing operations and reducing costs. Despite the loss for the year, created by non-cash impairment of goodwill, cash flow remains positive, and the balance sheet is very healthy. Our cash and short-term investments totaled $562 million at the end of the year after investing $276 million in our properties, $15 million in exploration and business development, and paying $31 million in dividends. We are focusing on diversifying our portfolio with high-quality assets and providing value accretion to our shareholders by using our cash primarily on project development, as demonstrated by our recent transaction with Premier. I'll now turn it back to Ian to wrap up.

Thank you, Jeff, and just few comments in summary. Our Gatsuurt project was designated as a mineral deposit of strategic importance in January and this paves the way for the development of the project. We're on track to complete the feasibility study on our Öksüt project in the middle of this year. The Trans-Canada transaction, including the flagship Hardrock Gold Project, expands and complements our two current gold projects Gatsuurt and Öksüt, and provides diversification and additional production growth. The company has a solid financial position. For 2015, we have a consolidated all-in sustaining cost of $898 to $1003 per ounce, which includes all of our sustaining capital but does exclude taxes. We're continuing our discussions and working with the Kyrgyz government to resolve all of the outstanding concerns relating to the Kumtor project, to achieve an agreement that's fair to all the shareholders. And as we announced yesterday, we've maintained our divided at $0.04 Canadian for the quarter, which at our current share price represents an annualized yield of over 2.7%. So operator with that let's open up the call for questions. So operator if you could please give the instructions for the process, we'd appreciate it. Thank you.

All right. Thank you very much sir. [Operator Instructions]. Our first question comes from the line of Botier Sharapov with HSBC. Please go ahead.

Hi, everyone congratulations on solid results. Couple of questions from me. Can you possibly give us some color on production profile on 2015 on a quarterly basis, when are you going to be done with the cutbacks 17 and may be outline the tonnage for your high-grade and low-grade stockpiles?

Certainly this is Gordon, I can answer that. The mining from stock -- from cutback 16 is going to make up the bulk of our mill processing for the year. We are just completing cutback 16 as I speak, plus the stockpiles we built up at the end of the last year that will feed the mill for the first roughly nine months of the year, and we compete that from the stockpiles and mange the grade to an average grade. In September, we accessed the ore in cutback 17 but it is not the high grade portion, it's the medium grade portion which is roughly the same average grade as the grade that we'll be feeding in the first nine months of the year. At the end of 2015, we expect to be still above 60 meters away vertically from the high-grade portion, so we won't access that until the first quarter of -- the high-grade portion of cutback 17 till the first quarter of 2016.

Okay, thank you. And switching to the -- I guess mine plan permit, how long are you willing to may be wait for the mine plan permit this year, if you're starting to think about alternative measures. And what reasons, I guess if any, was given by the geology and environmental agencies with the refusal to review your application?

It's actually not a refusal to review the application. We've -- hopefully 17 years now been operating in Kumtor and in the Kyrgyz Republic, every year, at the end of the year you have to file your subsequent year's mine plan for review and approval by the State Agency Geology, and the State Agency the Environmental Protection and Forestry, they both have to approve that plan. There is also a requirement for a number of other permits to be renewed on an annual basis, some in January, and other at later stages during the year. So during that, because of the timing some of these permits you cannot apply for until December, every year we dealt with questions from the agencies on the plan applications, following which they've approved the plan usually February or March so. This year and we submitted not only the annual mine plan, but also the life of mine plan because we updated that last year using the updated reserves for them, and its -- we're having discussions on the annual mine plan and also further discussions with respect to the life of mine plan. We hope to get those resolved as quickly as possible to ensure that then we have all the permits in place.

Okay, thanks Ian. And the last one from me, with Kumtor reserves down, what is the regional geology around Kumtor looks like for any potential opportunities? And is there an appetite for bidding on the jewelry department that is being auctioned once again?

Well the work around Kumtor actually from 2004 through 2012 we expanded between $12 million and $15 million every year on exploration on the Kumtor license. And so we've completed a significant amount of drilling on a number of targets on the property. At this point, we think the continued opportunity for further expansion of open pit resources is probably fairly limited. The opportunities is really within the Central Pit following the SB Zone down dip. And to do that is a challenge for us right now because getting drilled platforms within the active pit to drill that extension is very difficult because you need to drill to be stationed there for at least two months to get to the depth you need to. So we likely won't be able to do any further drilling on the down dip portion of the SB Zone until we get close to completing the SB portion of the open pit mining. Elsewhere the Central Pit itself, really cannot be expanded any further simply because of the terrain, the strip ratio is already very high, and the topography is now working against you, and they're strictly to deepen the pit and it would require a significant increase in strip ratio, so it's just not economic. Outside of that, as I said, we tested a number of other targets along the 20 kilometers plus to come to a structure and there are small resources there. There are the reserves Sarytor and Southwest but nothing, no -- at least in our view right now, no further opportunity for a significant reserve increase. And as for jewelry, it's not something that we have looked at in any detail now some time. And I have not reviewed to be quite honest, the details of the tender document. But from what I understand, they actually are quite challenging. So I don't think it's something that we would be looking at, at this point in time.

[Operator Instructions]. Our next question comes from the line of Vitali Mossounov with Scotiabank. Please go ahead.

On Gatsuurt, I guess we were bit surprised and may be some other people too. But because you got the strategic approval a few weeks ago and then shortly after that a bit, the resolution or rather the Draft Resolution was voted down, I mean is there any particular reason why that happened? I mean what were the issues that that Parliament saw with the Bill?

It's Jeff, Vitali. It's -- I think what happened was the -- basically the bill was put to the Parliament on the last day of Parliament. And it was at a 20% level. And Parliament just felt they didn't have enough time to address it before the session ended. I think that that's primarily the problem. We fully expect them to come back in the spring session, which begins in April, beginning of April.

Okay. So there wasn't a case where one political party was opposed to it, because there are also rumors that there is some sort of -- there is lot of -- and I know it was a hunger strike or whatever it was there but there was some sort of organized opposition to this. Well, so you're saying it wasn't pressure from those particular groups that led to this negative vote?

Well I think it was really I mean, there was -- there is always going to be certain opposition to these types of things. And there was some of the smaller or one, at least one of the smaller parties that wasn't for it. But I think really the primary reason is just they felt that they would have been pushing it through too quickly without really given Parliament the opportunity to discuss it.

Okay. And with respect to I guess his name is Japarov, right, the former Head of Kyrgyzaltyn that's now in custody. Is that -- is his release one of the three conditions for a very successful completion of these negotiations or how do these get into all this?

Well, Dilger is still in custody and his trial is still ongoing and that is related to the $200 million dividend payment we made in December 2013. And until that trial is concluded we really can't make any comments on Dilger, and unfortunately and it's hopefully that will be resolved through the court process in Kyrgyzstan as quickly as possible.

Okay. And then a final question on the proceedings with Stans Energy and Kyrgyzstan. I know there is a Court date coming up in March in Moscow, there is going to be an appeal, possibly a successful appeal, if it is successful what is the process in the timeline for you going back to the Ontario Court and getting the injunction that, how would that look?

Let's be very clear. I mean this -- the case, the arbitration case is between Stans Energy and the Kyrgyz Republic, because the Kyrgyz Government, Kyrgyzaltyn, it doesn't involve Centerra at all. The order that we are under from the Ontario Court was brought by Stans Energy in the Court, as a result of the arbitration award in Moscow. And so we have no influence over the decisions that either of the courts make and should the ruling in Moscow in March and go in favor of the Kyrgyz Republic as supposed to Stans Energy then the Kyrgyz Government would have to take steps to get the order lifted.

And so the timeline on that, you wouldn't be able to comment on something like that.

No, the Court date right now is the date it's scheduled for March 2.

Okay. All right, great. Thanks very much for those answers.

We have no further questions on the phone line sir.

Hearing no further questions, I think we will thank everyone for attending the call. Just a quick reminder when we were talking about the Trans-Canada transition all the dollar figures were quoted in Canadian dollars. And if you have any further questions, please get a hold of us here in the Toronto office we are all around. Thank you very much for your participation.

Ladies and gentlemen, that does conclude the call for today. We thank you for your participation and ask you to please disconnect your lines.