Centerra Gold Inc. (CGAU) Q1 2016 Earnings Report, Transcript and Summary

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 Investor Relations. Please go ahead.

Thank you operator. Good morning everyone. I would like to welcome you all to Centerra Gold’s 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 home page, if people would like to follow along. And these summarize and illustrates some of the following remarks that we will 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. So joining me on the call today is Scott Perry, Chief Executive Officer; Frank Herbert, President; Darren Millman Chief Financial Officer Gordon Reid, our Chief Operating Officer. Also, I would like to caution everyone that certain statements on this call maybe forward-looking statements 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 will be discussing today are non-GAAP measures and I refer you to our description of the non-GAAP measures in the news release and the MD&A. For a more detailed discussion of the material risks, material assumptions and uncertainties, please refer to our news release that was 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 the Company's website. And now I will turn the call over to Scott.

Okay. 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 am just using the presentation deck that’s available in our website. I am just starting off on Slide number 5 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 re-telling all 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 are making some very good progress. Again, the bottom-line objective to be ensuring that we really are creating leaders in safety at every level of the organization and I think we're having some – making some good in-roads there. Moving on to the operating results here, during the quarter, first quarter, we produced in terms our gold output profile around 86,000 ounces of gold at Kumtor as we mentioned in our press releases 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 cost company-wide was around $1015 per ounce, but drilling down of the actual operational level at Kumtor, we had a favorable result of $916 per ounce at Kumtor in terms of its own sustaining cost profile. Again, I use the adjective that this is 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 namely be 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 rates that been realizing it’s been lower than planned, which is favorable. And we're continuing to see this resonating in terms of our cost structure as we move forward into the second half of this year, we are expecting 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 had, we were impacted in terms of our ability to monetize the goal. There is some good narrative there in the financial statements, but it essentially comes down to there was a delay in our counterparty finalizing the offtake agreement. This situation was resolved in early April, and since then, we have been routinely and periodically monetizing our goals. But, when you look at the face 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 that was quite material, it was around $35 million US that we can probably effectively put forward that our cash flow result was understated by, obviously, you will see these being captured in Q2 which obviously positions us well in terms of earnings and cash flow profiles moving forward in Q2. So the headline results, net earnings result was just over $18 million US which is around $0.08 per share. In terms of the cash flow from operations result, which is 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 a net cash of $426 million US, that puts us on a very strong liquidity footprint, if you will, and together with the recently announced $150 million US project financing facility, that was established for our offset project in Turkey. We think we are – 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 with the Mongolian government on the Gatsuurt project. Our team right now is heavily involved in developing and negotiating our investment development agreements. We’ve been cautiously optimistic that we should have positive news well on this in the short-term. Just the last item here on Slide 5, we mentioned in our press release, we’ve been very focused on maximizing productivity at our operations and doing everything we can in the most efficient and effective manner possible and we are seeing the results that at the operations likewise in terms of our corporate office, we've also been taking a very disciplined review of our cost structure. You can see with today’s press release, we’ve announced that we’ve actually reduced our 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 am going to transition on the next slide which is Slide 6. 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 – it’s really just an illustrative snapshot of our cash flow statement that’s been broken down into a waterfall chart if you will. You can see we commenced the year with $542 million in cash and you can see the various decrements there. We ended the quarter with $503 million in cash. Again, the one thing I have to reiterate is, when you look at the Kumtor cash flow portion it was negative cash flow of $10 million. But again, I would advocate if we want to normalize that, this delayed gold sales and the impact there, too, which was approximately $35 million US. So if we were to normalize that, we could potentially advocate that Kumtor made positive cash flow of $25 million. Nonetheless as you move clockwise and the top-right quadrant in terms of the balance sheet, we are in a very strong financial posit ion as you can see we’ve got cash reserves of some $502 million US. A very modest debt which results in the net cash position of $426 million. The chart in the bottom-left shows that the share count, obviously Centerra has always been very focused on minimizing its share count and really maximizing the intrinsic value behind every share and you can see, we’ve continued to put forward a very stable share count of about 6 to 7 years. Lastly, the chart on the bottom-right, in terms of retained earnings profile and obviously with the today’s releasing of financial statements, generally speaking, year-over-year, Centerra continues to build out the retained earnings profile, and which is, as illustrated in this chart referencing the redline chart which is the gold price even in a declining gold price environment, Centerra has continued to demonstrate what I would call is peer-leading profitability as well as an ability to grow it’s retained earnings and things really speaks to the quality of operations and their margins there too. With that, I am now going to pass it over to Darren Millman our Chief – sorry, I apologize, with that I am now going to pass it over to Gordon Reid our Chief Operating Officer. Gord?

Thanks, Scott. As Scott mentioned, Kumtor produced 126,444 ounces of gold in the quarter at an all-in sustaining cost of $916 per ounce sold. Kumtor continued to implement past and productivity improvements including completing modifications to the mill, which improved overall recovery and increased throughput and improved or blending techniques to better manage the prey grobbing characteristics within the ore body. In the quarter, Kumtor continued to benefit from low oil prices that resulted in low 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. Our 25% of Kumtor operating costs are denominated in Kyrgyz som whereas diesel fuel accounts for 17% of operating cost. Quarter-over-quarter, operating cost at Kumtor decreased by $19 million reflecting lower mining, milling and site throughput costs. Mining cost were lower by 14%, milling cost lower by 3% and site support cost lower by 6%. Our unit mining costs in the quarter were $1.22 per ton mined and our milling costs were $10.07 per ton milled. I will now turn it over to Darren to talk about financials.

Thanks, Gord. Good morning everyone. I am initially talking to slide 10 for those following the slide deck. For the first quarter, revenue was $73 from the sale of 61,744 ounces reflecting 65% reduction in ounces sold compared to the prior March quarter. Average realize gold price was $1186, down 2% from the prior year. This is resulting in a $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 to plan. Kumtor ended the quarter with 33,165 ounces of gold dore inventory due to delay in the March gold shipment to the Kyrgyz open refinery. Shipments resumed in April as Scott mentioned and also gold inventory was subsequently sold in April. If we had of sold, that’s a gold in March it was the impact would have been additional $35 million in revenue and in our treasury. For those once again following the slide deck if you 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 a 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 executed with Stradach International Plc. in Q4 of 2015. We continue to look at ways to draw our cost down and to reduce our G&A cost. We reduced our headcount at corporate office by approximately 20% and are implementing other cost reduction programs. Our key cost, such as diesel and our local Kyrgyz supply cost represents approximately 40% of our operating cost and it’s trending down below our guidance. The Kyrgyz som is currently trading at approximately 70 som to one US dollar. This compared to a forecast assumption of 65 som to one us dollar for guidance purposes. Our forecast assumption for diesel was at $0.55 later at Kumtor whilst during the quarter we achieved $0.43 per liter. As you will know in the sensitivity slide on Slide 18 of the pack, both cost assumptions have significant impact on our cash flow and cost 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 now turn it back to Scott.

Okay, thanks, Darren. Just, we just have one final slide before we open up the call to Q&A. So just referencing Slide number 13. Before talking to Slide 13, just quickly in terms of an update on our development projects. When I look at what, probably what are the – 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 quite offset as Darren has mentioned, as I mentioned, the asset we put in place a very attractive project financing facility there. Really we are just waiting on the approval of our land use permit. Once we have these in hand, we are very well positioned in terms of our ability to commence construction and we are pretty excited about being in a position to do that very shortly. Moving on to Mongolia, at our Gatsuurt project, we are currently drilling with the two rigs and as I mentioned, at the outset, we are also actively negotiating with the government right now on putting in place definitive agreements covering a deposit development agreement and our investment agreement and things are progressing well. And again, cautiously optimistic that we should have some positive news flow 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 the feasibility study and we believe we will be in a position here to be reporting on that at the mid-year mark of this year. Referencing the, I guess, the slide on Slide 13, as Darren mentioned, one of the first points I’d make is we are 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 $0.04 Canadian 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, into the chart, on the top right-hand corner, this is our flagship asset Kumtor. We continue to expect in this kind of business environment Kumtor to be a strong consistent contributor of 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 of $426 million. As Darren mentioned, we’ve put in place financial facilities on Oksut as well as re-extending EBRD revolving facility. We think we’ve got a great treasury position to really build out our future growth profile which is illustrated in the chart in the bottom-right. As move each of these projects forward, we see a conceptual sort of scenario here and we could be doubling our company-wide gold output profile over the next five to six years as we move these development projects forward and I think 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. So with that, that sort of wraps up our prepared remarks and we might now pass this meeting over to the operator to take any question and answers please.

[Operator Instructions] And there appears to be one question on the queue. It comes from the line of Alex Watt with ScotiaBank. Please go ahead. Alex Watt, your line is open. You may proceed with your question. Okay.

Can you guys hear me?

Now we can hear you. Thank you.

Okay. Sorry about that. Can you give a breakdown of the milled ore? What portion came from stockpiles and what came from mine during the quarter?

I don’t have the exact number in front of me, but the majority of the ore did come from stockpiles where we are not mining large amount of ore at this time. We get into that early in the third quarter.

Okay and I am guessing then, you don't have a sense of what's in the stockpile right now as far as tonnage and grade?

No, I do have a sense. It’s – we have a significant number of tons well over a year’s worth of milling. But the grade is, the average grade is below 2 grams.

Okay, thanks. That’s it for me.

[Operator Instructions] Our next question comes from the line of Richard Gray with Cormac. Please go ahead.

Hi, guys. Just - is there any way to provide guidance as to how the quarterly, kind of output is going to look like to get to your guidance for the year?

Hi, Richard it’s Scott. I think generally speaking, what we put forward in terms of our – sort of gold output per ton 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 with the corresponding 60% we produced in the second half.

Okay.

I would see second quarter gold output being slightly higher than Q1’s results and the next go into the second half of the year the grade profile definitely picks up quite a bit as we start moving high grade ventures in terms of our sequencing and second half will be a lot stronger in terms of gold output.

Okay, that’s helpful. Thank you.

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

Okay well, thank you, operator. We will look to end the call there. And, thank you everyone for joining us today and thanks for your interest in Centerra Gold.