Centerra Gold Inc. (CGAU) Q4 2021 Earnings Report, Transcript and Summary

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.

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.

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 operation, we have reported a -- in terms of our gold resources, we reported an increase of some 1.4 million ounces. And in terms of our copper resource inventory, we've reported an increase of some 450 million pounds of copper. As we communicated previously, we are embarking on a new technical study at Mount Milligan and we expect to be releasing that in the second quarter of this year. And 1 of the key objectives is to be upgrading a lot of this new resource into reserve category, which should underpin an extension in Mount Milligan's indicative reserve life. And then just lastly, the last bullet point. As we announced on Tuesday morning the exciting acquisition of the Goldfield District Project in Nevada and I will speak to this towards the end of this presentation. But again an important development for Centerra that I think is going to underpin our organic growth profile here in the medium term. Just referencing the charts down the bottom. Chart in the bottom left is Mount Milligan, you can see the full year result there. Again some $202 million in positive free cash flow, which is an excellent result. And then Oksut, which is the middle chart, again the column on the far right. Oksut in 2021 generated some $112 million of positive free cash flow. That also marked an important milestone at Oksut. If you take the free cash flow that we generated in '21 as well as the free cash flow that was generated in 2020, we have essentially paid back the entire upfront investment of some $200 million. So this has been a great experience for us and a real success and again just want to recognize the leadership team in terms of the results they have achieved there. Just moving on to Slide 6 of the presentation just in terms of some of the key corporate highlights. Starting off with safety first, it was a good year in terms of safety, Oksut during the year achieved 2 million hours of lost-time incident free operation. You can also then see that Endako achieved 8 years and our Thompson Creek Mine and Langeloth Facility, they each achieved 1 year of continuous operations without a lost-time injury. Again, important milestones and indicative that we are on the right path in terms of our pursuit and our objective for 0 harm operations. So again just want to commend the leadership teams across the organization. Just in terms of the third bullet point. As we announced at the beginning of the year, we have been engaged in negotiations with the political leadership in Kyrgyzstan regarding the dispute over the Kumtor mine and the illegal seizure of that operation. Generally speaking, the key aspect in terms of what we're negotiating here in terms of resolving this is Centerra will be looking to relinquish its legal ownership of the operation to Kyrgyzstan and in exchange Kyrgyzstan will be looking to relinquish their 26% shareholding in Centerra. As and when that's relinquished, we'd then be looking to turnaround and cancel their shares. In terms of the current progress right now it's with our respective legal advisors where we are working on negotiating what I would call the global settlement agreement and as and when that negotiation is finalized, we'll be in a position to sign that and press release that accordingly. So it continues to progress and hopefully we'll have more news on that forthcoming shortly. Just on the sixth bullet point, just want to again just recognize Mount Milligan. Mount Milligan had a record year in 2021 in terms of mill throughput. It was the highest level of throughput that we've seen in the history of the operation. And then you can see in terms of the free cash flow results, some $202 million, that was also a record year in terms of being the highest level of free cash flow that's been generated by the operation. Just on the eighth bullet point here, third last bullet point. Again I spoke to this earlier, but very low cost in terms of our all-in sustaining cost across the portfolio, very competitive $649 per ounce. And then as I mentioned earlier, you can see in parenthesis, the portfolio is certainly 1 that's showcasing a first quartile cost structure. Second last bullet point, we are anticipating that a lot of this strong production momentum is going to carry into this year. We are guiding for up to 425,000 ounces of gold in terms of the midpoint of our guidance and that makes for pretty compelling organic growth. Essentially we're expecting up to a 40% increase in gold production this year over last year. And then in terms of the last bullet point here, that growing level of gold production as well as the sort of current metal price environment, we are expecting a corresponding increase in the level of free cash flow generation. This year we are guiding for up to $250 million of positive free cash flow. So that's going to present well just in terms of the growth in our balance sheet and underlying profitability within the business. Just moving on to Slide 7 just in terms of our environmental, social, governance profile and just to some of the key updates here. As I spoke to earlier, safety continues to be absolutely paramount and I touched on some of the good milestone that we achieved in 2021. That will continue to be an enduring focus here moving forward over the course of this year. Third and fourth bullet points. We continue to advance our various strategies and initiatives when it comes to climate change as well as diversity, equity, inclusion and making good progress in that regard. And then just the sixth bullet point there, Centerra is a member of the World Gold Council and we have signed up to the World Gold Council's Responsible Gold Mining Principles and we're currently rolling these out and implementing these principles at each of our operating and project assets and making very good progress there and in very good stead to achieve full compliance in the coming 12 months. With that, I'm now going to turn the call over to Dan Desjardins, who's our Chief Operating Officer, and Dan can expand a little bit more on the operating highlights. So Dan, over to you, please.

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 middle of our guidance. Our gold production costs were very competitive $604 per ounce at the bottom end of guidance, which was $600 to $650 per ounce and this was due to the increase in the ounce production and strong cost controls. For 2021, our all-in sustaining cost on a byproduct basis from continuing operations came in at the $649 with Mount Milligan a very low $508 per ounce with the strong copper credits and Oksut at $668 per ounce. Please go to Slide 10 and we'll specifically look at Mount Milligan. Over the past few years, we had a strong focus on our process water management. A very positive step forward occurred on January 6, 2022 when we obtained the amendment to our Environmental Assessment Certificate to allow options on our long-term water requirements. We continue to work closely with our partners on our permitting requirements and environmental management plans as well as the licenses for occupation of the land required for pumping infrastructure. We will continue to construct the new staged flotation reactor, the SFR, but commissioning was setback to the end of March partly due to the supply disruptions, but also we had safety concerns during assembly that created the need to change our contractor. Although this did set us back, we felt that we must act on all safety issues as this is our most important value. We completed the first step of the Mount Milligan technical study, which was taking our 2021 drill results and produced the optimal resource there. The next stage will be convert the resources to reserves and produce a new life of mine 43-101 technical study, which is on track for completion in the second quarter. As part of our new life of mine, we did complete nearly 40,000 meters of drilling in 68 holes. The assays were delayed, but we have now included all of those in the resource update. The Mount Milligan team had a number of excellent production achievements under the leadership of our new General Manager, Carole Fortin. Of note in the past year was the achievement of the highest throughput for the site since the operation began in 2014. In the table at the bottom, you could see that the recovery of both copper and gold are somewhat variable quarter-to-quarter. This is due to ore type. But both copper and gold recoveries were slightly better than planned due to a new grinding process control system. We are anticipating continued improvements in our recoveries with the commissioning of the SFR in late Q1 and later a new flotation control system. Turning to Slide 11, we will discuss Oksut's highlights. Oksut Mine had a very successful year and is on plan with mining in the fourth quarter at Keltepe phase 2 and higher grade zone 4 as well as in Guneytepe. The higher grade output from the mine will continue through 2022. The exploration and infill drilling of 31,000 meters delivered enough additional reserves to cover the depletion for the year and this was with successful planning and we are going to do 40,000 meters in 2022. Oksut is now running very much steady state. Therefore the focus is on productivity and efficiency and thus we are putting out guidance that is a very competitive all-in sustaining cost for Oksut on a byproduct basis for 2022 of $425 to $475 per ounce of gold. In total we placed 195,990 ounces on the heap, of which 16,200 ounces was unirrigated. We poured 1,100 sorry -- 111,703 ounces, which was slightly above our 2021 guidance. Moving to Slide 12, we can discuss our Mount Milligan reserve and resource update. Mount Milligan was able to complete its drilling program and updated its resources with all the asset results. The new life of mine is planned to be released in Q2. Therefore this update we have just depleted the reserves. The reserve therefore did decrease from 2.1 million ounces of gold to 1.8 million ounces and for copper from 837 million pounds to 736 million pounds. We did have a substantial increase though in Mount Milligan's resources, which is now increased in terms of gold from 1.39 million ounces to 2.7 million ounces of gold and copper increased from 521 million pounds to 974 million pounds. We are taking all efforts to finalize the new 43-101 in Q2 and that will take into account this large increase in resources. On Slide 13 for Oksut reserves and resources. At Oksut, we did have an infill drilling as we did do near-mine exploration as well. The site was able to replace its throughput of 196,000 ounces with the additional 203,000 ounces. Therefore an increase in total reserve of 1.13 million ounces to 1.14 million ounces. Oksut resources also increased slightly from 230,000 ounces to 283,000 ounces with an average grade drop of 0.66 grams per tonne to 0.50 grams. This is due to the cut-off grade reduction of 0.20 grams per tonne to 1.6 grams per tonne. Moving to slide -- 2022 in terms of guidance outlook. For 2022, our consolidated gold production range is between 400,000 ounces and 450,000 ounces. Mount Milligan being 190,000 ounces to 210,000 ounces and Oksut from 210,000 ounces to 240,000 ounces. For copper, Mount Milligan is targeting to produce between 70 and 80 million pounds. For our consolidated gold production cost guidance for 2022, that will be between $500 and $550 per ounce with an all-in sustaining cost on a byproduct basis we are guiding a very competitive $600 to $650 per ounce. Milligan's all-in sustaining guidance within that is $575 to $625 and Oksut with the higher production is looking at guiding $425 to $475 per ounce. Moving to Slide 15. For 2022, we are guiding a total capital expenditure of $95 million to $105 million, of which sustaining capital is the majority coming in at $90 million to $100 million. The non-sustaining capital of only $5 million is a carry-forward from 2021 to complete the stage flotation reactor at Mount Milligan. Of note, we are looking to spend between USD35 million and USD45 million in exploration, including exploration at Mount Milligan of $12 million and Oksut of $5 million. Additionally, in regards to the newly acquired Goldfield District project, the company expects to incur $15 million to $20 million in relation to the exploration activities at the project in 2022. Overall, Centerra is guiding strong free cash flow of $200 million to $250 million at a gold price of $1,700 per ounce and a copper price of $4 per pound. With that, I will pass it over to Darren, our CFO, to review our fourth quarter and 2021 financial results.

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. This highlighted by the 2022 guidance with up to 240,000 ounces of gold to be produced. The adjusted net earnings per share was $0.12 for the quarter and $0.79 for the full year. I'll be now speaking to Slide 18. The net earnings from continued operations was $274.9 million in the quarter with $35.4 million in adjusted net earnings. The earnings in the quarter attributable to operations were $50.9 million contributed from the Mount Milligan mine, $38.7 million contributed from the Oksut Mine and a $1.2 million loss from the Molybdenum business unit. During the year and for the quarter, there were several adjusting items of significance that were noted on this slide. I'll be only speaking to the quarterly adjusting items. Firstly, the Mount Milligan mine impairment reversal net of tax recorded of $117.3 million. An initial impairment was recorded in Q3 2019. Since then, the Mount Milligan mine has improved with sustainable performance with the reduction in both mining and milling cost from a unit basis. This together with the increase in underlying resources and the long-term copper and gold price increases, Centerra has made the decision with confidence to reverse the impairment. We look forward to sharing the new Mount Milligan technical report in 2Q of this year together with the 3-year consolidated guidance update. Secondly, the gain on sale of the Greenstone property. An additional $25 million gain was recorded in the quarter. The trigger event being the construction decision made by Orion Resources and its JV partners. This amount is due and payable to Centerra no later than December 2023. Centerra has not recorded the additional consideration that is attached to the production milestones of the Greenstone project. Thirdly, the income and mining tax adjustments of $132.7 million was recorded. This is in connection to the Mount Milligan mine now recording a deferred tax asset given the confidence management now has on income generation from the Mount Milligan mine and the company using a 3-year forward look realization approach. The other adjusting items representing a combination of reclamation provision expense driven by the accounting standards and the need to apply current underlying discount rates together with the legal and other cost associated with the Kumtor file. I'll now move to Slide 19. From a cost perspective, Centerra's continued operations in the quarter recorded production cost of $550 per ounce of gold and for the year $604 per ounce sold. All-in sustaining cost on a byproduct basis of $591 per ounce was recorded in the quarter and $649 per ounce for the year. At an asset level for the full year, Mount Milligan recorded all-in sustaining cost on a byproduct basis of $500 per ounce, outperforming the 2021 guidance range of $530 to $580 per ounce. Oksut recorded all-in sustaining cost of $668 per ounce for the year, also outperforming the 2021 guidance range of $730 to $780 per ounce. The company exited 2021 with a cash balance of $947 million. The Board declaring a quarterly dividend of $0.07 per share. I would like to draw your attention to the bottom left hand chart. I would note in 2021, the free cash flow was $178 million. We see this growing to $220 million in 2022 using a $1,700 gold price and a $4 copper price at a midpoint. Obviously conservative in this current price environment. Based on our sensitivity analysis disclosed in January '18 press release, a $100 increment in gold price movement will generate an additional $35 million in cash for Centerra. Finally, the bottom right hand chart noting the 2022 column, our fully loaded for all-in cost is $725 per ounce of gold. Therefore for each ounce of gold produced, a very healthy margin. With that, I'll pass it back to Scott.

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 robust valuation moving forward just in terms of our valuation multiples. In terms of the work done to date by the vendor, I would say it's been very high quality. And 1 of the things we certainly noticed and noted is there's a lot of strong support in terms of the communities, in terms of the county and in terms of the regulated agencies. So we do expect to be establishing a strong license to operate here. One of the important aspects here in terms of the industrial logic is it allows us to leverage our existing operating expertise. So as we've commented previously, we see this being very similar to our Oksut gold mine in Turkey and that's going to allow us to leverage a lot of our exploration, development and operating expertise and again hopefully replicate that success that we had with Oksut and replicate that here with the Goldfield District Project. Second last sort of row here just in terms of the exploration potential, we think it is significant. It is a large land package and in terms of the overall endowment here, in the history it has produced some 4 million ounces of gold. We think it is still under explored. We have a number of drill-ready targets that we'll be pursuing and our objective here is to be expanding the known deposits and extending the mine life and that will certainly be a key focus here in 2022. And just lastly, we know this project well. We have been evaluating this since 2020. The level of due diligence that we had undertaken here has been quite extensive and that obviously underpins our confidence in the overall sort of opportunity here. In terms of this year, I think some of the key milestones that -- sorry. Over the next 18 months, some of the key milestones we'll be pursuing with the Goldfield District Project is in the first half of 2023, we'll be publishing a Centerra resource for the property and thereafter, we'll be publishing a feasibility study and moving this project forward so it's in a position for a potential construction decision. So overall, I think it's an attractive value proposition. We're very excited about this and particularly so because this will represent our next source of organic growth to Centerra in the medium term. Just moving on to Slide 22, which my final slide Really what I would just highlight on this slide just in the bottom right hand corner. As Darren spoke to, a very good year in terms of free cash flow generation. You can see the column on the far right, we generated some $178 million of positive free cash flow and we're really looking forward to this year. Obviously our gold production, we've got good organic growth. Our gold production is growing by 30% to 40% and just given the current metal price environment, that should certainly make for another strong year in terms of free cash flow. Again in terms of the upper end of our guidance, we're guiding for up to $250 million of positive free cash flow. And that level of profitability and cash flow generation, that's going to certainly underpin our peer-leading balance sheet. And likewise, our investment in Goldfield District Project. So again I think we're well-positioned and in great stead for another year of strong performance at Centerra. With that, I'm going to conclude our prepared remarks. And Dina, if I can pass it back over to you just to facilitate the Q&A session, please.

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

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.

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.

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?

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.

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

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.

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.

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?

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.

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?

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.

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

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?

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.

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.

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.

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

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?

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.

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?

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.

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

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?

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.

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?

Dan, do you want to respond to that?

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.

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?

Absolutely, yes.

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

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?

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.

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

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

No further questions at this time.

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.

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