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Centerra Gold Inc. (CGAU)

Q4 2021 Earnings Call· Sat, Feb 26, 2022

$18.00

-4.33%

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Transcript

Operator

Operator

Greetings and welcome to the Centerra Gold Fourth Quarter and Full Year 2021 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded Friday, February 25, 2022. I would now like to turn the conference over to Toby Caron, Treasurer and Director of Investor Relations. Please go ahead.

Toby Caron

Analyst

Thank you, operator. Welcome to Centerra Gold's fourth quarter and full year 2021 results conference call. Summary slides are available on Centerra Gold's website to accompany each speaker's remarks. Today's call is open to all members of the investment community and media in listen-only mode. Following the formal remarks, the operator will give the instructions for asking a question and then we will open the phone line to questions. Please note that all figures are in US dollars unless otherwise noted. Joining me on the call today are Scott Perry, President and Chief Executive Officer; Darren Millman, Chief Financial Officer; Dan Desjardins, Chief Operating Officer; Dennis Kwong, Vice President, Business Development & Exploration; and Malcolm Stallman, Vice President, Exploration. I would like to caution everyone that certain statements made today may be forward-looking statements and as such are subject to known and unknown risks, which may cause our actual results to differ from those expressed or implied. Also certain measures we will discuss today are non-GAAP measures. Please refer to the description of non-GAAP measures in our news release and MD&A issued this morning. For a more detailed discussion of the material assumptions, risks and uncertainties, please refer to our news release and MD&A along with the audited financial statements and notes and all of our other filings, which can be found on SEDAR, EDGAR and the company's website at centerragold.com. And now I'll turn the call over to Scott.

Scott Perry

Analyst

Thanks, Toby, and a very good day to everyone. Thanks for joining us for our year-end earnings results conference call. As Toby mentioned, I'm just referencing the summary slides that are available on our website. So just starting off on Slide #5. Just want to speak to some of the key bullet points here in the top left. 2021, it was another strong year in terms of the company-wide gold production profile. As you can see for the full year, we finished with some 308,000 ounces of gold output, which was at the very upper end of our guidance range. So a good level of performance from both of the respective operations. In terms of the third bullet point, just given that strong level of metal production in terms of our corresponding all-in sustaining cost per ounce, I think it was a low competitive $649 per ounce and again I'll just highlight that that was favorably lower than our full year guidance range. You can see in parenthesis there just each of the all-in sustaining cost results of both Mount Milligan and Oksut so I think underpinning a portfolio that is certainly lower cost quartile. The strong metal price environment that we're seeing in gold and copper as well as our low unitary cost just in the fourth bullet point here, we had an excellent year in terms of free cash flow generation. We generated some $178 million of positive free cash flow and again that was above the upper end of guidance so a favorable result. With today's release, we've also reported our year-end reserve and resource update. And I think a couple of the key highlights here is we have replenished production depletion at our Oksut operational gold mine. And then also in terms of our Mount Milligan…

Dan Desjardins

Analyst

Thanks, Scott. Good morning, everyone. Please move to Slide 9 and I'll start with the 2021 operating highlights. I'd like to start our 2021 operating highlights with a focus on safety. In Q4 our total recordable injury frequency rate, our TRIFR, was 1.89 due to a number of incidents at Mount Milligan and 1 more severe incident at Oksut where a contractor injured his finger. Overall our TRIFR was 1.02, which is well above our target and is given a rise for need for even further focus on our visible felt leadership in the field. 2 positive milestones, as Scott spoke to, in the year were that Oksut Mine did achieve 2 million work hours without a lost-time incident. And Endako having 8 years although on care and maintenance still has a number of activities at site in that 8 years. And Thompson Creek and Langeloth facilities, both went through the year without a lost-time injury. Centerra continues to prioritize the health and safety and well-being of its employees, contractors, communities and other stakeholders as COVID is still with us. Just as other businesses, we are seeing stresses in our supply chain and on a couple of our small capital projects, but our people have been staying ahead and it is there, there's not been any material negative effect on our operations. On the production front, we had another strong quarter at our 2 operating sites producing 91,197 ounces of gold and 17 million pounds of copper at an all-in sustaining cost on a byproduct basis from continuing operations of $591 per ounce sold. On a full year gold ounce production came in, as Scott indicated, at 308,141 ounces which is right at the top end of guidance with our copper production coming in at 73.3 million pounds in the…

Darren Millman

Analyst

Thanks, Dan. Good morning, all. For those following on the slide deck, I'm on Slide 17. Centerra recorded $251 million in revenue during the quarter consisting of the Mount Milligan mine, the Oksut mine and our Molybdenum business unit. Revenue consisted of $136 million in gold sales and $62 million in copper sales and $52 million from our Molybdenum business unit. In the quarter, our continued operation sold 90,312 ounces of gold, 58,642 ounces from the Mount Milligan mine and 31,670 gold ounces attributed to Oksut Mine. We also sold 17.2 million pounds of copper in the quarter. For the 2021 year, our continuing operation sold 314,757 ounces of gold, a 21% increase year-on-year. This is representing the upper end of our 2021 guidance. We also sold 78 million pounds of copper, a 3% decrease at the Mount Milligan mine. This is attributable to the 16% decrease in copper grades processed during the quarter -- during the year. This was positively offset by the 4% additional tonnes processed and the higher level of inventory held at the start of 2021. During the quarter, the company's operations average gold price realized was $1,504 per ounce and $3.59 per pound of copper. This incorporates the existing streaming arrangements over the Mount Milligan mine. Cash provided by operating activities from continued operations was $61.8 million for the quarter and $271 million for the year. Free cash flow from operations for the quarter was USD38.7 million and USD178.4 million for the year. At an operational level, the Mount Milligan mine generated $46 million free cash flow for the quarter and $201 million for the year. The Oksut Mine in the quarter generated $35 million free cash flow and $112 million for the year. The Oksut Mine is now in the higher grade gold sequencing.…

Scott Perry

Analyst

Thanks. Darren. Just referencing Slide 21 just to recap. As we announced this past Tuesday, an important development here at Centerra is the acquisition of the Goldfield District Project. I think this is going to be important to the organization moving forward just being 1 of our key sources of organic growth here over the medium term. In terms of the transaction and the rationale, you can see as per the slide we're acquiring this project for some USD175 million in cash with a further milestone payment of $31.5 million in cash for Centerra shares at our election. The $175 million in cash obviously means that our share count will not be growing. And so in terms of the value proposition here in the -- we expect this to be an accretive transaction especially when you think about how we're increasing our shareholders' gold exposure be it resources, future reserves or future incremental production. A lot of strategic rationale in terms of pursuing this project and you can see that illustrated on the slide here. Firstly, we think this adds a high quality development project to our pipeline. It's a conventional open-pit heap leach project, very similar to our operational Oksut gold mine. We expect this to be a meaningful source of future low cost production. And in terms of future construction, we would certainly note this project should have low capital intensity, similar to our experience with our operational Oksut gold mining operation in Turkey. It's going to improve our geographic profile. The project is located in Nevada, which is deemed a Tier 1 mining jurisdiction. And importantly to Centerra, this is going to favorably sort of reposition our portfolio just in terms of our geopolitical risk profile and I would like to think that's going to support a…

Operator

Operator

[Operator Instructions] Our first question is coming from the line of Fahad Tariq with Credit Suisse.

Fahad Tariq

Analyst

Can you touch a little bit on how you're thinking about capital allocation? I mean, I think you touched on this right at the end of your presentation. The balance sheet has $900 million of cash, the recent acquisition cost around $200 million with another $200 million of CapEx. Like there's still quite a bit of capacity to maybe raise the dividend, do buybacks, maybe even further acquisitions. Just any thoughts on how you're thinking about the balance sheet and how to potentially leverage some of that cash.

Scott Perry

Analyst

We certainly recognize that the balance sheet is in a very strong position and in terms of that cash balance, you could advocate that it's surplus to our sort of medium-term requirements moving forward. And that's something that myself and the Board, we're cognizant of. We have been having a number of discussions around sort of potential shareholder friendly capital return initiatives. In the past, we've always been primarily focused on our dividend distributions. And if you look back over the last sort of 2-year period, we increased our dividend to $0.04 per share per quarter, then to $0.05 per share per quarter and then most recently we've increased it to $0.07 per share per quarter. There will continue to be discussions and deliberations on that with the Board. We certainly have the opportunity to look at increasing our dividend distributions even more so. But also we debate and we deliberate on potential share count reduction initiatives all the way considering things in terms of a normal course issuer bid or do we do something more substantial in terms of a substantial issuer bid. So we'll continue to evaluate these things, but the 1 thing that dictates the timeline around all of this is we're waiting until we have resolved the situation with the Government of Kyrgyzstan. As I mentioned at the outset of the call, progress is pretty good there in terms of the negotiations around finalizing the global settlement agreement. But it's not until we have fully resolved that situation that we'll be able to actually embark on any sort of meaningful capital return initiatives. The reason being the Government of Kyrgyzstan through their agency [indiscernible], they are a 26% shareholder in Centerra. So we want to wait until we've resolved that shareholding and thereafter, I think that will put us in a good position to really embark on those evaluations and discussions around what we could be doing incrementally in terms of capital return initiatives.

Fahad Tariq

Analyst

Okay. And then just switching gears to Goldfield. Can you just give us a rough idea of timeline like what are some milestones maybe in 2022?

Scott Perry

Analyst

Yes. So look over the next 18 months, we’re in what we call the definition phase around the project. And so if I look at this year for example, we’re going to be extensively focusing on infill drilling as well as our exploration investment. All of that work will be going into and supporting a property resource update that we’re looking at publishing in the first half of 2023. In parallel, the technical team is commencing work on detailed engineering, water studies as well as other technical aspects, metallurgical test work, et cetera. And a lot of that work will then support a new feasibility study for the project and that feasibility study itself will then support a new technical report for the property. And the reason we’re doing all of that is we want to make sure that we’re positioning the project for a construction decision over the next 18 months. Assuming we do get that construction decision and a positive approval from the Board in terms of sanctioning the construction of the project, we’re then looking at a 2-year construction timeline. So again really the key sort of catalyst here, Fahad, is a resource update in the first half of 2023 and then shortly thereafter we'll be publishing the feasibility study for the property.

Operator

Operator

Our next question is coming from the line of Dalton Baretto with Canaccord.

Dalton Baretto

Analyst

Scott, congratulations on the acquisition. It looks good from my perspective. I just want to follow up on that previous line of questioning there. There's some parameters out in the public domain that were put out there by the vendor and I'm just wondering how much can we rely on those parameters in terms of resource size and grade, in terms of kind of mine life say in your production, just those sorts of metrics.

Scott Perry

Analyst

Look Dalton, when we did all of our due diligence and what have you, the evaluations we've been doing over the last 18 months to nearly 2 years, obviously we rely on the work that the vendor's technical team have done and they've done a lot of good work. But what we're seeing is a larger opportunity especially in terms of the indicative of a conceptual resource and that's something we're going to be quite focused on. A lot of our investment this year, as I mentioned earlier, is focused on our sort of exploration programs that we're already sort of drafting, if you will, or preparing, but also a lot of infill drilling as well. And ultimately what we think we're going to be preparing here is hopefully a larger resource for the property and thereafter a more optimized feasibility study. So I understand your question, I want to put forward that you shouldn't rely on any previous technical studies because we're looking to optimize a lot of those studies. And again if we do have success with the drill bit, that's obviously going to result in a different sort of profile as well. So hopefully that answers your question, Dalton.

Dalton Baretto

Analyst

Okay. That makes sense. That also segues into my next question. So I understand that this project is fully permitted, which is a huge win in the U.S. As you go about optimizing as you put it in, how much -- would you put that permit at risk or is everything you're going to do within the constraints of that permit?

Scott Perry

Analyst

No. I would say more likely than not we're going to have to update some of those permits, which is -- there's mechanisms for that and I would put forward that should be a relatively routine process. You can imagine in terms of our valuations and our diligence and what have you. We have had interactions with the local county, the regulators, the agencies, et cetera. We do see good support for this project and for the conceptual development here so I would not see that as a issue of high concern. We think there's very good support for this. And likewise in terms of the permits that are already in place, I think we're going to be looking at amendments. But we just have to wait and see how things go over the next 18 months with overall resource and the conceptual design and what we are going to be seeing here in terms of Centerra being the operator.

Dalton Baretto

Analyst

Okay. And then just maybe switching gears with one last question. You mentioned the surplus cash, if you will, over the medium term and you mentioned shareholder returns. Is M&A completely off the table now?

Scott Perry

Analyst

From my perspective, I think we consider ourselves pretty fortunate to have acquired this Goldfield District Project. And so when I think about our focus here over the medium term, I think it’s going to be very focused on execution. Obviously at Oksut and Mount Milligan, we’ve got a pretty compelling year here in terms of organic growth in our gold production profile and the resulting profitability and free cash flow. But then the team are going to be very focused on moving forward what we believe is going to be our next source of organic growth in terms of the Goldfield District Project. So I would see a lot of our focus being on that front. The thing what I find most challenging personally when I try and think about the organic growth is just the current gold price environment. It’s a pretty strong gold price, valuations reflect that accordingly. And so it’s really difficult when you think about potential inorganic growth opportunities. It's difficult in terms of identifying ones that can meaningfully create shareholder value. I think we’re fortunate with this one. We see a pretty compelling value proposition here in the Goldfield District Project, but they are few and far between. Now having said all of that, I think as and when we do resolve the situation with Kyrgyzstan and clean up the share capital structure and compress our share count, I think Centerra is going to be a very clean organization. And potentially we have a peer leading balance sheet, we have a very low cost profile, we’ve got organic growth in front of us. So if opportunities are presented to Centerra, we would obviously consider those in line with our sort of fiduciary obligations and if there’s something compelling there, then we would engage accordingly. But I’m giving you a long answer, Dalton, but I think – just in terms of the status quo, I think a lot of our focus is going to be on the Goldfield District Project here over the short to medium term.

Operator

Operator

Our next question is coming from the line of Mike Jalonen with Bank of America.

Mike Jalonen

Analyst

A lot of my questions were answered. So I'll skip to the Mount Milligan study coming out. I guess Scott, thanks for the breakdown of the reserves and the resources, it's very impressive M&I resource increase. I was just wondering basically in 2021 Mount Milligan mined processed 0.46 grams per tonne gold as you know, the grade of the deposit 0.38 and the grade of the M&I is 0.31. So it seems to me that the grade will come up when your planned reserves go up, grade will come down. To maintain production at Centerra, if I'm right with those assumptions, is Centerra looking at expanding Mount Milligan's processing capacity to keep production steady?

Scott Perry

Analyst

Thanks for the question, Mike. Right now we are not envisioning expanding the capacity of the Milligan facility. In terms of the sort of go-forward gold production profile and copper production profile, we see it being relatively uniform year-over-year and you'll see that as and when we finalize the new 43-101 and we can publish that. But having said all of that, I would just -- Dan, is there anything that you'd want to sort of put forward just in terms of responding to Mike.

Dan Desjardins

Analyst

Mike, it's an excellent question. Mike, I guess 2 things. One is the 43-101 that we'll put out will be within our permitted, which is 60,000 tonnes per day so we won't be envisioning in that. But we are doing some scoping studies right now to see if there is an opportunity to either debottleneck and have a slight increase in our throughput or can we bolt on a gold plant or even substantially increase the throughput. So we're in the middle of that right now for the next, say, 6 months just to take a look because as you indicated as we increased the reserve resources, is that opportunity there. But right now with the high -- the excellent productivity that Carol and her team are getting both in operational activity and also cost control, we can see ourselves making a good return even as the grade has lowered little bit.

Mike Jalonen

Analyst

Okay. Well, thanks for that and good luck. And Scott, I'd be happy to buy you a beer in the lobby bar next Monday night.

Operator

Operator

Next question coming from the line of Mike Parkin with National Bank.

Mike Parkin

Analyst

Most of my questions have been asked. But going back to Goldfield, I recognize that the old study you don't want us to kind of rely on. But is the strip ratio of that project proposed given that you're kind of starting off the same area. Is it kind of fair to assume that a strip ratio in and around that kind of level could be maintained? What's your early thoughts on what you're thinking?

Scott Perry

Analyst

It's hard for me to really respond to that because again we're going to be optimizing a lot of those studies and investing quite a bit in infill drilling and sort of exploration drilling that's focused on potentially expanding each of the 3 deposits and more. And so then we have to sit down with all that information that we're getting with the drill bit and really look at optimizing these studies and really look at how sequencing and phasing the development. So I don't really want to talk to strip ratios or in situ reserve grades or productivities or what have you. I think what I would be comfortable saying is that we think this is going to be quite similar to Oksut. That's the kind of look and feel that we kind of have based on all our valuations and all our modeling today. But I just don't want to get ahead of the resource update and the feasibility study that we will be authoring and publishing.

Mike Parkin

Analyst

Right. One last question on it though is in terms of what is secured in terms of permits for water access, is that a limiting factor and is that something that 1 of the amendments that you're looking to make -- would be looking to address if it sounds like potentially the scale of this project could be bigger than envisioned by the previous owner and would this kind of suggest that you need additional water access?

Scott Perry

Analyst

No. We looked at that pretty extensively. That was a key focus along with other facets. And I think as I mentioned on Tuesday, we even invested in additional hydrology drilling. We did a 3-day water testing of the identified aquifer. That aquifer is permitted already. And also the project or the vendor, they already have water supply agreements in place with the county and the state. And coming out of that 3-day water test that we invested in, we were able to validate or substantiate that it does supply sufficient water in terms of what the project would require in terms of our kind of envisioned production profile scenarios. And yes, so we were quite satisfied in that regard. And if I haven't mentioned already, the project already does have water right permits and we deem them sufficient.

Operator

Operator

Next question is coming from the line of Anita Soni with CIBC World Markets.

Anita Soni

Analyst

So firstly on Kumtor, I just wanted to understand in terms of the negotiations. Outside of the cancellation of shares that you're talking about and relinquishing Kumtor to the Kyrgyz government, is there anything else that we should be thinking about? I know there were significant tax obligations and I think there were some environmental allegations. Would those all go away as well or would there be something outstanding that we would also need to be thinking about?

Scott Perry

Analyst

Anita, so I think we put out a press release on January 3 where we just updated the market on what are the key sort of commercial aspects that have been negotiated and that all remains the same. There's no change to that. What we've been doing since that initial round of negotiations, we've now passed it over to our respective legal advisors and they're now documenting and papering up the whole deal and putting together what we call a global settlement agreement. A lot of the work right now, a lot of the negotiations is around the mechanics in terms of how would each party terminate and cancel any legal claims or what have you that have been brought forward as part of this whole dispute. So that will result in a number of conditions precedent to closing that would need to be satisfied. And so on the Kyrgyz side, as you referenced, any civil claim, any criminal claims, any environmental claims; all of those would have to be terminated permanently. And then likewise on the Centerra side in terms of the legal actions that we've launched, for example the international arbitration, the Chapter 11 proceedings, we would have to terminate those proceedings as well prior to closing. So that's really what we're working on now is just agreeing on all the mechanics, et cetera. And it's something -- it's sensitivity for both sides perhaps, but definitely for ourselves because I think as I've commented before, we absolutely want this to be a clean exit. And that's what we're very focused on right now. And as and when we are satisfied in that regard, that's when we'll be in a position to sign the deal and announce it accordingly.

Anita Soni

Analyst

Okay. And then the second question was just another follow-up on Mount Milligan. So just there's been a few moving parts, we had a resequencing of the plan and I think that resulted in slightly lower production this year. And then I'm just trying to understand why really on the life of mine plan that you're putting out and the technical report that you're putting out, why would that necessitate and what are you hoping to achieve on that? And as Mike referenced with the lower reserve grade or the lower resource grade, if you said the grades are going to remain similar, when would they come down to the resource grade or the reserve grade because presumably that would have to eventually happen?

Scott Perry

Analyst

Dan, do you want to respond to that?

Dan Desjardins

Analyst

I can certainly take a shot at it. Certainly as we sequenced this past year as we did our drilling, we realized that there's a good chance of really expanding the pit in a number of different directions and at depth. So we did change our locations. There are a couple of places in the mine that are higher in copper and lower in gold and vice versa. Couple of places where it's quite a bit higher in gold and lower in copper. So that really changed the sequencing over these next couple of years in anticipation of what we probably see as the new haul roads, new pit designs and access to these areas. In terms of the grade that will be in the reserves, we don't have those numbers yet in terms of what will convert from resource to reserve. But we are seeing that with the higher productivity, the higher recoveries and the lower costs that we're certainly able to have good financial results with that added productivity, which will be incorporated into the new life of mine.

Anita Soni

Analyst

Okay. And I guess one last question on that. On the op -- the op costs are coming down so that's helping you get a lower cut off rate I'm understanding that. But when you look -- when you think about things like the sustaining capital associated with that, is that included when you're thinking about the reserves, when you do your sort of breakeven analysis? I know lots of companies have different policies on that. I just want to understand where yours is?

Dan Desjardins

Analyst

Absolutely, yes.

Operator

Operator

Our next question is coming from the line of Trevor Turnbull with Scotiabank.

Trevor Turnbull

Analyst

Maybe just sticking with Dan to follow up a little bit more on Mount Milligan. I was just curious if you could make any comment, you did talk about how the pit's likely going to be expanding in several directions and at depth and obviously we're hoping for good reserve conversion given the size of the resource increase. But can you talk about how the general strip ratio may change relative to what we've seen. I mean it's certainly possible to expand the pit and kind of maintain the same type of strip ratio. But I wondered if there was reason to think that might change. And then the follow-up to that, I guess is how do we feel about tailings capacity? Is that something that's easy to expand or do you have to look for new areas? And then finally, the long-term water plan, is that -- maybe just remind me where you're at on the long-term water plan, please?

Dan Desjardins

Analyst

Well, let’s start with the strip ratio. Again we don’t have the final reserve pit yet, but the strip ratio of Mount Milligan is very low so there will not be a material change in that I would not envision. In terms of tailings, as probably most people know, we did reduce the life of the mine 2 years ago and with this additional resource and with the new pit, I don’t believe we’d be looking at any – at this time we’re not going to be expanding beyond what we had originally permitted before. So there won’t be a tailings requirement there. But at some point in time if we were to continue to expand the reserve and resources, there is space near mine that you could have either a second tailings or there would be a limit of how high you could raise it up. In terms of long-term water, we’re in a very excellent position right now. We’re still in the area with 4.5 million cubic meters of water through the mill and we hardly dropped at all because we have additional aquifer water that we’ve been pouring in. So we’re very comfortable and we continue to do exploration drilling for additional aquifer water, which seems to be very successful so far. On the long-term water potential of taking from surface, we did get as we indicated in the presentation our environmental permits in January and we continue to work on submitting all of the information required with our partners in order to be able to move that forward if it’s required. Right now, as I indicated, we’re at a very stable situation with the subsurface aquifer water and so we feel we’re in a very strong position. And if we do require, which we have been taking water although a limited amount this last summer, we took 3 million cubic meters of water from a local creek. We were permitted for 6 million cubic meters, but we stopped because we had enough. So again we’re just working our way through that process, but so far it’s been very positive and the Firs’ Nation partners and the regulators have been working with ’s very closely.

Operator

Operator

And our last question in queue is a follow-up question coming from the line of Dalton Baretto with Canaccord.

Dalton Baretto

Analyst

Actually operator, all of my questions have been answered. Thank you.

Operator

Operator

No further questions at this time.

Scott Perry

Analyst

Okay. Thanks, operator. And again thank you, everyone, for joining our call. And we wish everyone a good day and look forward to engaging and speaking in due course here moving forward. Thanks, everyone.

Operator

Operator

That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.