Centerra Gold Inc. (CGAU) Q3 2018 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Centerra Gold 2018 Third Quarter Results Conference Call and Webcast. [Operator Instructions]. As a reminder, this conference is being recorded, Wednesday, October 31, 2018. I would now like to turn the conference over to John Pearson, Vice President, Investor Relations. Please go ahead.

Thank you, Edison. I'd like to welcome everyone to Centerra Gold's third quarter conference call. Today's call is open to all members of the investment community and media. We posted summary slides on the company's website which will accompany each speaker's remarks. Following the formal remarks, the operator will give instructions for asking a question and we will then open the phone line to questions. Please note that all figures are in U.S. dollars unless otherwise noted. So today, joining me on the call is Scott Perry, President and Chief Executive Officer; Darren Millman, Chief Financial Officer; and Yousef Rehman, our General Counsel. I'd like to caution everyone that certain statements on this call may be forward-looking statements and as such, are subject to known and unknown risks, which may cause actual results to differ from those expressed or implied. Also, we are going to be talking about certain measures that are non-GAAP measures, and I refer you to our description of non-GAAP measures in the combined news release and MD&A. So for a more detailed discussion of the material risks and assumptions and uncertainties, please refer to our news release and MD&A issued this morning along with the unaudited financial statements and notes and to our other filings, which can also be found on SEDAR and the company's website. And at this point, I will turn the call over to Scott.

Okay. Thank you, John, and good morning, ladies and gentlemen. Thanks for joining our conference call. I'm just starting off on Slide 4 of the presentation deck that John referenced. Just speaking to each of these highlights. First - just firstly most importantly, in terms of safety. Our mine sites, our operations had another safe quarter, and we continue to roll out phase two of our company-wide safety leadership program called Work Safe - Home Safe. The key objective of this program is as best possible, fostering an environment of zero harm in the workplace. One of the key safety highlights during the quarter was at Öksüt. Oksut is now in construction and the project is 26% complete. But what is most pleasing is we've now just recently achieved a key milestone of 750,000 hours of lost time incident free construction activities. On December 10, we expect that we'll be at 1 million hours of lost time incident free operations. So a key milestone, and just want to extend my congratulations to our operations team there at Öksüt. Construction activity continued at the Öksüt project throughout the quarter. The main access road and the side road construction were substantially completed and the installations, including the crusher area, the ADR plant area, the heap leach pad site and other site infrastructure are advancing safely and according to plan. During the quarter at Mount Milligan, mill throughput averaged 40,805 tonnes per calendar day or approximately 55,000 tonnes per operating day. Throughout the quarter, throughput was impacted at Mount Milligan by lower than forecasted chemical availability related to an unscheduled shutdown in mid-July for repair work at the primary crusher and another unscheduled shutdown at the end of August and into early September to repair transformer damage from a lightning strike. The scheduled shutdown in late September was also extended to replace the SAG mill shell liners. The company submitted an application on October 18 to enable drawing of water from Philip Lake, Rainbow Creek and additional groundwater sources within a radius of approximately six kilometers of the tailings storage facility. The company is still in discussions with regulators, First Nations and other affected stakeholders regarding these applications and expect that access to these sources may be granted as early as the end of January 2019. Such approvals would apply until the summer of 2021, enabling the company to benefit from the spring melt flows for three seasons while a long-term updated water supply plan is developed. Just referencing Kemess. The Kemess project achieved another milestone in the quarter as it received its effluent discharge permit after receiving the amendment to its Mines Act Permit in the second quarter, which ultimately approved the underground mine plan and the corresponding reclamation program for the Kemess Underground Project. Just moving into the operations and our production results. During the quarter and earlier than planned, Kumtor accessed and started mining and processing the higher-grade material from the SB zone in the central pit. As a result, the company has increased its production guidance at Kumtor for this year to a new increased range of 490,000 to 510,000 ounces. Likewise, our company-wide production has increased to 665,000 to 705,000 ounces. Given the growing levels of gold output, we have also lowered our expected all-in sustaining costs on a by-product basis. At Kumtor, our all-in sustaining cost guidance has been reduced to $700 to $750 per ounce. And likewise, at Mount Milligan, we have also reduced our all-in sustaining cost guidance with the new guidance being $825 to $875 per ounce. All of these favorable reductions bring the company-wide consolidated all-in sustaining cost guidance down to our new range of $782 to $829 per ounce sold. Just in terms of the earnings, in Q3, we achieved net earnings of $6 million or approximately $0.02 per share. In terms of the quarterly production, the operations produced a total of 181,000 ounces of gold and 20 - 12.7 million pounds of copper in the quarter. And I think what was really impressive was the very low all-in sustaining cost at which this production was produced. Our company-wide all-in sustaining cost during the quarter was $698 per ounce bringing the year-to-date to $861 per ounce. Financially, the business delivered approximately $67.1 million of consolidated cash from operations before changes in working capital. Kumtor and Mount Milligan generated $64 million and $19 million, respectively, before working capital changes. Lastly, we finished the quarter with $545 million of total liquidity. And after the end of the quarter, we announced the sale of our Mongolian business unit for net proceeds of $35 million. Moving on to Slide 5. Slide 5 just contains four charts that just graphically illustrate some of the key financial highlights during the quarter. In the top left, you can see the waterfall chart that's illustrating our year-to-date cash flow profile. As I mentioned, Mount Milligan and Kumtor were both positive free cash flow generation during Q3. And as we make our way now to Q4, now that Kumtor has accessed the higher grade SB zone, we're expecting robust gold production at continued low operating cost, and we should see increased free cash flow generation and profitability. The liquidity chart in the top right just our liquidity profile at the end of Q3. As I mentioned earlier, we've got approximately $545 million in liquidity. So very well-funded. And moving forward, our business plan is an internally funded business plan. In the bottom left is just our net debt position. Finished the quarter with net debt of approximately $142 million. So just in terms of our overall indebtedness or the leverage through the business, it's very low. And then lastly, just in terms of the profitability. The retained earnings chart in the bottom right. We finished the quarter with an excess of $1.1 billion of retained earnings on the balance sheet. Just moving on to the next slide on Slide 6. Slide 6 just highlights each of our individual operations and future development projects, and we're just referencing this against the World Gold industry all-in sustaining cost curve. As you can see, our existing operating assets, we've been very close to being lower cost quartile at the company-wide guidance. I think what we're all very excited about is what is going to represent our third source of high quality low cost production, being the Öksüt project in Turkey, which is now construction. It's just going to favorably complement our existing low cost profile and will be an important third source of low-cost production. Just moving on to Slide 7. Really, the key bullet points I'd highlight here is the third bullet point. Obviously, Kumtor had a very successful year-to-date in terms of their mine productivities and just how they're ultimately phasing and sequencing the mine. They are ahead of plan. As I've mentioned a couple of times, they're now into the high-grade SB zone, and that's really going to underpin the robust gold production result this year. As a result, we've increased our gold production guidance at Kumtor to 490,000 to 510,000 ounces for this year. This resulting increase in gold output is going to have a favorable reduction in terms of Kumtor's all-in sustaining cost profile. We've actually reduced the guidance there to a new range of $700 to $750 per ounce. So the fourth bullet point is worth highlighting. The Öksüt Project continues to progress very well. We're now at 26% completion, and the project is progressing on time and on budget. And as I mentioned, it's incident free, very safe construction, which is great to see. In terms of the table at the bottom, in terms of the quarterly result, just really want to highlight the low all-in sustaining cost profile at each of our operations. Kumtor had a fantastic quarter, producing its gold as low as $662 per ounce. Likewise, at Mount Milligan, it was very low cost during the quarter at $677 per ounce. And then you can see in the last row in the table there, on a company-wide basis, we came in at $698 per ounce. And again, it is this level of performance that's underpinning the favorable reduction in our guidance in terms of all-in sustaining cost. Our new guidance on a company-wide basis, calendar year 2018 is all-in sustaining cost of $782 to $829 per ounce. Just moving on to the next Slide on Slide 8. Some of the bullet points I'd highlight. The second bullet point with regard to Mount Milligan. During the quarter, we did operate at 55,000 tonnes per operating days, which was good to see. The next bullet point below in terms of our gold and copper recovery efficiencies, we continue to improve year-over-year, which is something we've been targeting. So that's great to see as well. And in terms of the fourth bullet point here, one of the key items that we have been focusing on is accessing - getting approvals for additional access to water. We submitted our applications to - after the end of the quarter, and we're expecting to have additional access to water from Philip Lake, Rainbow Creek and groundwater that's within six kilometers of the existing tailings storage facility. We think when this application is granted, it will provide significant volumes of water with the onset of the 2019 spring melting season. The last bullet point that I reference, and the final bullet point there, which is we're reconfirming our annual production guidance for Mount Milligan both in terms of gold and copper and again, we are favorably reducing the all-in sustaining cost guidance. Just moving on to Slide 9. Öksüt obviously represents our next producing gold mine coming through the construction pipeline. As I mentioned, we're 26% complete on this and the project is on time, on budget and we're targeting first gold pour in Q1 of 2020. What we put together here is just a few images of some of the construction activities that are taking place. On the top left there, you can see the mine access road. Moving in a clockwise direction, you can see the construction activities of the main crusher area. Top right is the primary crusher facility. In the bottom right is our electrical substation. In the middle center of the bottom is our ADR plant construction area. And the very bottom left of the slide is our secondary crusher facility. Everything seems to be going really well here in terms of the progress. And again, we're hoping to be able to demonstrate an on-time, on-budget construction on what is going to be a very important third source of profitable production for Centerra. With that, I'm going to pass this slide over to Darren Millman, our Chief Financial Officer. And Darren will walk us through some of the financial results.

Thanks, Scott. Good morning, everyone. For those following on the slide deck, I'm on Slide 11. Revenue for the quarter was $259 million, consisting of $143 million from our Kumtor Mine, $72 million from the Mount Milligan Mine; and $44 million from the Molybdenum business unit. On a consolidated level, Centerra realized a gold price during the quarter of $1,123 per ounce and realized copper price close to $2.00 per pound. This recognizing the Mount Milligan Streaming Arrangement. We recorded $67.1 million operating cash flow before changes in working capital. And for the quarter, we realized adjusted earnings of $0.05 per share. The adjusted earnings taking into consideration the impairment of the Mongolian business units of $8.5 million with the cash proceeds subsequently being received on October 11 with all conditions precedent for the sale met at this time. Now following on Slide 12. We sold 166,716 ounces of gold and 13.6 million pounds of copper in the quarter. As noted by Scott, we recorded consolidated all-in sustaining cost of $698 per ounce during the quarter made up of $662 per ounce at the Kumtor mine; and $677 per ounce at the Mount Milligan Mine. We have also favorably revised both guidance metrics with our production guidance now tightened and increased to 665,000 and up to 705,000 ounces of gold, driven by the Kumtor Mine performance. And our cost guidance has also reduced at both mines with the consolidated midpoint for our all-in sustaining cost at $805 per ounce projected for the year. Year-to-date, we have produced 441,000 ounces of gold and remained well positioned as we move into quarter four with the Kumtor Mine now processing the high-grade ore. The company remains in a strong financial position with $545 million of liquidity available at the end of September. The slight increase in our net debt position attributable to the production of the Öksüt - to the construction of the Öksüt Project and utilization of the facility. With that, operator, I'll turn it back to you to take questions from those participating on the call.

[Operator Instructions]. Our first question comes from the line of David Haughton, CIBC.

A few questions, operational level. Looking at Kumtor, you're going to be looking at a very big fourth quarter, knocking on the door of 200,000 ounces to get to your guidance. And just wondering how we should be thinking about that, like the grade would have to be well into the full gram level, if I'm calculating correctly. Maybe you've got some comments.

Yes, David, thanks for your questions, David. And exactly, we expect Q4 to be the largest production quarter of this year. As I mentioned earlier, we are now well into the high-grade SB zone, and we're seeing that on a daily basis in terms of the mine grade, et cetera. In terms of the throughput that you should be assuming for Q4, it will be similar levels of throughput, as what you saw in Q3. And then in terms of the grade, you're correct, it's going to be higher than what we achieved during Q3. So I think in Q3, our growth was around 3.03, and obviously, it's going to be higher. I'm reluctant to give you a specific number, Dave, because we don't really guide on grade. But the way you framed your question is valid.

Okay. And just looking ahead, I've been assuming a steady-state throughput of the mill at about 17,000 tonnes a day or at 6.2 million tonnes per annum. You've been getting that's pretty easily and consistently over the last number of quarters. What should we be thinking about as your ideal throughput at Kumtor?

I think to the credit of the management team at Kumtor, they've been working on a number of different continuous improvement initiatives in terms of achieving those higher throughput rates. And I think they've now got the mill to a state where it's running really well. Quite consistently there, they're achieving daily throughput rate of up to 18,000 tonnes per day. And I'm feeling comfortable that, that's kind of the new sort of benchmark that we're expecting moving forward. So if you were modeling up to 18,000 tonnes per day of throughput in Q4, I think that's the right sort of target.

And then going into 2019 similar kind of idea there that moving up towards the 18,000 tonnes a day?

Yes, I mean, we're in a budget cycle, as we speak, David. And so we haven't provided guidance for 2019. But obviously, we have been privy to some of the draft business plans for next year, and that's kind of the expectation in terms of throughput. Again, targeting up to 18,000 tonnes per day.

Okay. Over to Mount Milligan, hard to judge how the winter will treat you at the back end of this year and beginning of next calendar year. And I guess, I'm just trying to look for a little bit of guidance there as to what we should be thinking. I mean, 55,000 tonnes a day, we have kind of been conditioned as the new norm. You've been able to get that on an operational day level. Should we be thinking sub 50,000 tonnes a day on average for Q4 and Q1 sort of thing?

For Q4 and Q1, if you have a look at our disclosure, one of the things that we are flagging is dependent on water availability and seasonality conditions, et cetera. And we may be in a position when we're only operating on one ball mill. If that is in the case, David, then our throughput rate would be approximately 30,000 tonnes per day. If we're comfortable with what we have in terms of inventory there, then we can obviously operate at a higher rate and have both ball mills operating. We're definitely comfortable with achieving the guidance level on the gold production and the copper production. And then - the other thing we're flag - we're flagging in our guidance for Q1 is again, we may have to operate in just one ball mill. But then when we have the spring melt season, we think we're going to be - we'll have significant volumes of water, especially as and when this environmental assessment amendment is granted such that post the spring melt season, which is usually in March or April 2019, once we had that spring melt season, we would expect to be operating the ball mills at full-speed, which would mean we'll be targeting more than 55,000 tonnes per calendar day.

Got you. At Öksüt, you've got good progress there. I noticed that you're reducing your expected CapEx this year. It was previously $82 million. You're now guiding more like $62 million for the year. Part of that is deferral and part of that is saving. How much should we be thinking of it as a result of the saving given the currency?

I don't think we're in a position to really quote that right now, David. But you're right, we are seeing some savings in terms of the Turkish lira devaluation. You're also seeing some different timing in terms of the targeted spend and what have you relative to the original guidance. But I still think in terms of the project being at 26% completion, we management are not ready yet to revise the overall project construction cost. So for now, we're staying firm that this is a $220 million construction project.

Okay. So I'll make this my last question now. Chaarat has been making a bit of a nuisance of itself through the course of this year with offers for Kumtor and now coming out saying that they have made a cash offer for the company. Putting it into context, the company, Chaarat has only got a market cap of under GBP 90 million. Do you have any comments about where they're at and whether you had looked at their proposals or not?

Absolutely, we looked at their proposals, we have got a fiduciary obligation to do such. But really, all I can say, David, is like with any kind of proposal that any company would look at, in terms of their consideration, generally speaking, the first thing we look at is, "What is the value proposition? What is the conditionality to that value proposition?" Then you do that assessment and you kind of define on, well, "what is the actionability of this proposal?" And based on that assessment, the company determined that no action was required.

[Operator Instructions]. The next question comes from the line of Trevor Turnbull with Scotiabank.

Yes, I just had a couple of quick questions. Again, going back to Mount Milligan and the water. One of the things you mentioned in the MD&A with respect to permitting is that you've talked a couple of times about amending the environmental assessment certificate to withdraw water in a way that's protective of the environment. And I know currently, some of what your restrictions are, 15% of the base flow. I was just wondering because you didn't reference the 15%, are you guys looking to potentially amend it so that you get more than 15% of base flow? Is that an option for you guys?

Yes, Trevor, that's something that we're in discussions with, with the regulators and the First Nations and the other impacted stakeholders. So that is something that we're looking at, but I can't say much more than that.

Okay. And then just my second question is just with respect to kind of the experience you had last winter. I know that there's water stored at the tailings facility and that towards the end of the year, got into a situation where there was some freezing issues. Has that been fully mitigated with the configuration of the tailings so that you don't anticipate that this year?

Yes, there was a number of lessons learned given the unfortunate experience of last year. So I'd like to say we're learning from those lessons learned. And in terms of our strategy for the onset of this winter season, we don't see that as a risk. But having said that, we're going to be managing the water balance very carefully, especially in terms of our throughput productivities during Q4. Obviously, the more we're processing, the more water we're utilizing on a daily basis. But I think the number one sort of natural modus operandi here is we're going to make sure that we do not have or do not risk an entire mill shutdown. So as I've kind of said in our guidance and our commentary, in Q4, we may very well just be operating on one ball mill to ensure that the water consumption on a daily basis matches the water that we're realizing from our groundwater wells, our base underdrain towers and any kind of runoff.

Okay. And just to that last comment, you're obviously keeping that option open, even expecting potentially to go to one ball mill, but that's not something that happened yet. You're still up at two ball mills at least to this point.

Yes, that's correct. We're operating with two ball mills right now.

[Operator Instructions]. The next question comes from the line of Mike Parkin with National Bank.

With regards to Öksüt, can you tell us, are the bulk of the contractor bids in U.S. dollars or are they priced in local lira?

Mike, it's Darren here. There's just over a handful that are based in U.S. dollars. So I'm assuming you're referring to the decree 32 on the note itself. Yes, so we're just working with suppliers and construction companies at the moment, just with a view to abide by that change.

[Operator Instructions]. We do have a question from Mike Jalonen with Bank of America.

Just had a question on Kumtor. Obviously, as David mentioned, you have a great quarter coming up - well, coming right now. And 40,000 ounces extra production this year at Kumtor because you got to the SB zone earlier. What does that mean to 2019 Kumtor production? Should we assume 40,000 ounces less gold output?

Yes, Mike, thanks for your question. As I kind of mentioned earlier, we're in a budgeting cycle right now in terms of finalizing our budget plans for next year. So we - obviously, we're not in a position to provide guidance for next year, yet. Having said that, certainly understand the context of your question. And I would say the answer is no. From recollection, from memory, the production for next year in the technical report, the life-of-mine plan is 475,000 ounces. And in terms of what we're seeing in our budget, we expect that we'll be able to guide to a similar level of production. And again, that's a credit to the guys at site and everything they have been working on, the various continuous improvement initiatives. This is them being accelerated and ahead of their mine planning, their sequencing, the higher grade profile that you would expect in subsequent years. They are effectively bringing all of that forward, which means you're not going to see any such shortfall in terms of the gold production we'd be targeting for next year.

And Mr. Pearson, there appear to be no further questions on the phone line. I'll turn the call back over to you.

Okay. Thank you very much, Edison. With that, we want to thank everyone for participating in our call today and look forward to any further questions that you might have. We're in the office, able to answer those. Thank you.

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