Centerra Gold Inc. (CGAU) Q1 2015 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the 2015 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, Friday, May 1, 2015. I would like to now turn the conference over to Mr. John Pearson, Vice President-Investor Relations. Please go ahead.

Thank you, Wendy. Welcome to Centerra Gold first quarter conference call. Today's conference call is open to all members of the investment community and as Wendy mentioned to the media in listen-only mode at first. After our formal remarks, we will open the phone to questions. 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 CEO; Jeff Parr, Chief Financial Officer; Gordon Reid, Chief Operating 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, today certain measures that we will be discussing 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 assumptions and risks, please refer to our news release issued last night with the MD&A along with the unaudited financial statements and notes and to our other filings, which can be found on SEDAR and the company's website. And now, I'll turn the call over to Ian.

Thank you, John and good morning everyone. During the first quarter, we produced about 171,000 ounces of gold with 164,000 ounces coming from Kumtor, which was more that we were planning as we processed higher grades in the first quarter. Our all-in sustaining costs for the first quarter were $718 per ounce sold. On the financial front, we reported net earnings of $41 million or $0.17 per share. And cash provided by operations was about $130 million. We have a strong balance sheet as our cash, cash equivalence and short-term investments, totaled $544 million at the end of the quarter or $468 million of net of debt. And that’s even after paying $67.4 million to acquire the 50% interest in the Trans-Canada Property. Now regarding our negotiations with the Government of Kyrgyz Republic and the Heads of Agreement, as many of you are aware, on the 9 of April Prime Minister Otorbayev reported to Parliament on the status of negotiations. When he reported that to Parliament he said that he no longer supported the restructuring of the Kumtor Project is a fifty-fifty joint venture between Centerra and Kyrgyzaltyn. Since he felt this was not in the best interest of the company, he also was very clear that nationalization of the Kumtor mine was not a viable alternative either. Since then Prime Minister Otorbayev resigned on the 23 of April and yesterday Parliament approved Mr. Temir Sariyev as the new Prime Minister. We know Mr. Sariyev, Mr. Sariyev was the Minister of the Economy in the prior three governments, and he has been the member of the government advisory council for Kumtor, so he’s familiar with the status of our discussion and then Heads of Agreement. So now that he’s been appointed, we expect to resume my discussions with the government about the way forward towards a resolution of all of the outstanding methods affecting the Kumtor project. During the quarter, we also continued our discussions with the Kyrgyz Government agencies concerning the approval of the 2015 mine plan and the other permits for running Kumtor. The permits that were expiring at the end of the quarter were extended to June 4 and we are continuing to work with the agencies to address any questions that may have with respect to the 2015 annual plan. In Mongolia, the parliament is now incision and we’re continuing our discussions with the government to determine the ownership structure of the Gatsuurt Project. In February, the Mongolian Parliament made amendments to the mineral law, relates to the projects – mineral law that were related strictly to the projects designated as those of strategic importance. The amendment allows the government and the investor to negotiate a special purpose royalty of up to 5%. And that is an alternative to the government participating ownership in the project. So we’re continuing our discussions with the government on the form that their ownership interest in the Gatsuurt Project will take. During the quarter we closed the Trans-Canada transaction and the partnership has commenced 14,000 meter in-fill drilling program and the results of this work will be included in the new resource estimate that we expect to complete in the third quarter of this year. Work has continued on the various other studies and assessments to advance the feasibility study for completion either later this year or early next year. The Öksüt project in Turkey, work is progressing well and we’ve recently filed the Environmental Impact Assessment with the Turkish government and work on the full feasibility study is going as planned and we’re on track to have it complete by the middle of the year. So with that I’ll now turn the call over to Gordon, so we can give you an update on our operations.

Thank you, Ian. As Ian mentioned, Centerra started the year well by producing 164,000 ounces at an all-in sustaining cost per ounce sold up $634 per ounce in Q1 as compared to 103,000 ounces produced at an all-in sustaining costs per ounce sold of $1058 per ounce in the comparable quarter of 2014. Mill feed for the quarter was a mix of both ore directly mined from the pit and ore from stockpiles. We will continue to process stock piled ore until late in the third quarter, when cut-back 17 reaches the upper part of the SB Zone. The 40% decrease in all-in sustaining cost per ounce sold is almost entirely due to the increased ounces produced and sold in Q1 2015. Mining cost during the quarter, including capitalized stripping, decreased $8.2 million compared to Q1 2014. The reduction in costs is primarily due to $3.7 million savings in diesel fuel costs. Our fuel cost in Q1 2015 was $0.69 per liter compared to $0.78 per liter in Q1 2014. And $2.4 million savings in labor costs due to a favorable exchange rate with the Kyrgyzaltyn and 20% reduction in expatriate personnel. Kumtor continues to evaluate every opportunity to further reduce operating costs and improve operating efficiency. Milling costs were lower in Q1 2015 versus Q1 2014, primarily due to fewer tons being milled, as a result of the 19 day plant shutdown to replace the cracked ring gear and other plant maintenance including changing the SAG and Ball Mill liners. The mill has been running at full capacity since March 15th with no issues. During the quarter, we issued an updated technical report for Kumtor. The updated technical report details Kumtor’s new life of mine plan, which is based on and is consistent with Kumtor’s mineral reserve estimates as of 2014 year-end. The new life of mine reflects an updated production profile and updated operating and capital costs from those that were disclosed in the prior technical report for Kumtor dated December 20, 2012. At Boroo gold production in the first quarter of 2015 was 6,400 ounces, which was lower than last year’s first quarter and reflects the mill ceasing production in December 2014. Of the 6,400 ounces produced, 3,600 ounces were recovered from mill cleanup and 2,800 ounces were recovered from secondary leaching up the leach bed, from the leach bed. During the quarter, Boroo remained cash positive. I’ll now turn over the call to Jeff to talk about our financial results.

Thanks, Gordon. Good morning everyone. On a consolidated basis, our first quarter revenue of $213 million reflects 53% increase in gold sold for the quarter, compared to last year, which along with cost reductions resulted in net earnings of $41 million or $0.17 a share. Also as Ian mentioned, cash provided by operations was $130 million or $0.55 a share. These results were achieved in spite of a 6% lower average realized gold price of $1,213 an ounce, compared to $1,293 an ounce realized in the first quarter of last year. Our cash in short-term investments totaled $544 million at the end of the quarter, which includes $76 million outstanding under our revolving credit facility. This is after investing $72 million in our properties, $67 million to purchase our interest in the Trans-Canada Property, $3 million of accretive element costs of Trans-Canada, $3 in exploration and business development and paying $5 million in dividends. For 2015, we’re maintaining our outlook for capital expenditures at the operations of $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 and is primarily for the relocation of certain infrastructure. For 2015, our planned expenditure for the Trans-Canada Property has been set of approximately $20 million for technical studies, environmental and social impact assessments, project support, in-fill and condemnation drilling, and securing certain properties for future project development, and exploration. At the end of the first quarter, the partnership had completed 4,800 meters of the 14,000 meter of the diamond drill program designed to further defined and in-fill drill to Hardrock deposit for the resource update. The company continues to have a strong balance sheet and good cash balances and as such we’re maintaining our quarterly dividend. I’ll turn it back to Ian to wrap up.

Okay, thanks Jeff. And just few comments in summary. Overall the company has a solid financial position. We will be continuing our discussions and working with the new Prime Minister in Kyrgyz Government to resolve all the outstanding concerns related to Kumtor Project. We filed the EIA for the Öksüt Project and working on completing the feasibility study. So that we can take it to our board in the middle of the year, and as Jeff mentioned, we set the initial budget for 2015 spending on the Trans-Canada to $20 million, which includes exploration in-fill and combination drilling and another work to advance the feasibility study which we expect to have completed by last this year or early next year. For 2015, our expected consolidated all-in sustaining costs have not changed. We still stand at $898 to $1,003 per ounce sold. However, we have increased our consolidated all-in costs to reflect spending on the Trans-Canada property. And that new range is now a $1,041 to $1,163 per ounce sold. This includes all of our sustaining costs in growth capital. Care and maintenance cost at Boroo, exploration and business development expenses, and project development cost that both Öksüt and the Trans-Canada property, as well as corporate costs. But it does exclude revenues based taxes and income taxes. So with that let's open up the call for discussions – for questions, I beg your pardon. So operator would you please give the instructions on the process of the question-and-answer session.

Certainly. Thank you. [Operator Instructions] We have a question coming from the line of Botier Sharapov with HSBC. Please go ahead.

Hey, Ian and the team, congratulations on the superb quarter. A few questions from me. That Kumtor outperformed your own expectations for the quarter in terms of stock pile grades and ore grades remained from cut-back 16. And I guess how does the Q2 and Q3 product look like now assuming that the average grade that your stock piles is probably lower than it was at the year end.

This is Gordon. Kumtor is producing as per expectations. What we did is with that higher grade material in the first quarter than the average. So therefore the second and third quarters will be you will see us have declining grade as we continue. We maintained our gold production guidance for the year.

Okay, great. Correct me if I'm wrong, but I believe Mr. Sariyev added the Kyrgyz state Investigation Community which undertook the review of Kumtor operations in the Fall of 2012, when Babanov was still a Prime Minister, is that correct?

Yes, Botier it’s he and it is you’re correct. Now the Prime Minister Sariyev, was the former Minister of the Economy, even in the Babanov government 2012, when he formed the state commission July 2012, he appointed Mr. Sariyev to head that up, which he did and they reported back to parliament December of that year.

Okay, great. He should be quite familiar with Kumtor operations. What his level of engagement in the HOA discussions? And how far do you think you can get them up to speak here, given that the window to complete the restructuring is getting tighter as we speak?

He is very familiar with the ongoing discussions that we’ve had. He has been part of the Kyrgyz government’s advisory council, which is primarily made up with the key cabinet ministers that are consulted on a continuous basis with respect to developments and negotiations around the Kumtor matter in the Heads of Agreement. So they are updated routinely by the Kyrgyz Working Group.

Great and the last question. Just to clarify the Kumtor 2015 mine plan for Kumtor was approved, but you are still waiting the ecological platform [ph] the state environmental agency. Is that correct?

Well, what has been approved so far is we have had the safety and resource aspect of the mine plan approved by the State Agency of Geology. We are waiting for approval now on the environmental aspects of the 2015 mine plan from the State Agency of Environmental Protection and Forestry and also approval of the ecological passport which has to be done once every five years. So that is also waiting approval and all of the other permits currently are valid and in place.

Okay, I guess that third permit [ph], you need third permit [ph] to actually finalize the mine plan approval and you also need ecological passport approved by the same environmental agency?

That’s correct. Yes, we need to have the environmental approval of the State Agency for Environmental Protection and Forestry, they have until June 4 to issue that under the regulations we’ve submitted all of the required documentation, answered questions, resubmitted it and the effective date became March 4, they then have 90 days to review it, and return back to us with reviews on it. Their approval of it, so that leads to the day of June 2 actually so.

Great, great thank you for taking my questions.

No thank you Botier. Thank you.

[Operator Instructions] I have no – well, I do have a question coming from Lawson Winter Bank of America. Please go ahead.

Thank you for that. Thanks for doing the call today, guys. two questions, one on Hardrock, I mean now that you kind of got your hands into the asset with your ownership what kind of timeline do you anticipate before a development while actually start in a potential production date?

Hi Larson, Ian Atkinson. And as we said we’ve now got to the partnership is working on the feasibility study completing the studies that are already underway. We are doing the in-fill drilling that we’ve both parties have agreed to that’s as Jeff pointed out, we are about two-thirds of the way I think that program and that will be used to update the resource model. And then once that’s done, there are obviously the mine plant can be adjusted to accommodate any resource change. And then the key thing is actually the work now actually on the milling it’s only thing the milling operation relative to that resource. So once we’ve got all that done that will lead us to the feasibility study that will give us the definite timeline then for moving the project forward. We hope to get the feasibility study done either late this year or early next year. And then that feeds in to the permitting process that is already underway. But you do need some of the – that the results particularly of the engineering work, construction work from the feasibility study to fix the timeline for the permits. So once that is done, we can give you a more definitive view on when we should be able to move it forward. But we have the feasibility study done by the end of the year or early next year. Then you probably looking at least a couple of years now for permits.

Okay, and actually just a follow up on that, and just a clarification something you said earlier was it $20million in 2015 is your total capital requirement to be spent at Hardrock?

It’s a total expenditure those are all U.S. dollars, this is US$20 million which is Jeff has pointed out that involves a number of things. There is the 14,000 meters of in-fill drilling, it’s also a significant amount of condemnation drilling being done and some exploration work not significant but the majority of that funding is advancing the feasibility study to bring it to a conclusion as quickly as possible. Some other expenditures related to land acquisition in the immediate area of the plant operations and pit. Jeff do you want to add anything there?

No, that’s it.

That’s great. And then just one other question was on the Lagares Gold Property in Portugal. Forgive me if I missed it in the past, but I think this is the first time you talked about it. And two questions. One, what is your current ownership position? And then what has to be spent and done in order to earn the 70% interest?

We – first, you’ve all heard, but – we all actually signed the auction agreement with our partners Met Gold and I believe this December last year. And so, what we’ve already got work underway; they’re actually drilling the property as we speak. And it’s an auction agreement that – Ron, could you just walk us through the terms of the auction agreement?

Under the agreement, we’ll be obligated to spend $3 million to earn 51% interest and then another $3 million to bring us to 70%.

And the time lines of that…

That’s over – the initial 50% – 51% is over three years and then the 19% is over two years.

That’s great. That’s all from me. Thank you so much for the call today and thanks for taking my question.

Thanks, Larson.

I have no further questions.

Hearing there are no further questions, we want to thank everyone for joining us on the call today. And if people do have any questions, please contact us here at the office, everyone is around and we’ll be happy to answer any further questions. Thank you.

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