Centerra Gold Inc. (CGAU) Q3 2022 Earnings Report, Transcript and Summary

Greetings and welcome to the Centerra Gold Second Quarter 2022 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Monday, November 7, 2022. I would now like to turn the conference over to Tobey Caron, Treasurer and Director of Investor Relations. Please go ahead.

Thank you, operator. Welcome to Centerra Gold’s third second quarter 2022 results conference call. Please note that presentation 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 each for asking a question and then we will open the line to questions. Please note that all figures are in U.S. dollars unless otherwise noted. Joining me on the call today are Paul Wright, Interim President and Chief Executive Officer; Paul Chawrun, Chief Operating Officer; and Darren Millman, Chief Financial Officer. I would like to caution everyone that certain statements made today are 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 of the 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 on the material assumptions, risks and uncertainties please refer to our news release and MD&A along with the unaudited financial statements and notes and all of our other filings, which can be found on SEDAR, EDGAR and on the company’s website at centerragold.com. And now I will turn the call over to Paul.

Thank you, Toby. Good morning and welcome to our third quarter conference call. Prior to commencing with our presentation, I wish to make a few brief comments regarding my time to-date in this interim role. My priority over the last 60 days has been to get out to our business units to better understand the people, the physical assets, the challenges and opportunities. I am pleased to report that the company now has highly confident dedicated professionals running our operations. I am very optimistic for the future of the company. I have and will continue to engage our shareholders as it relates to their opinions and concerns and work to ensure that there is clarity in terms of our strategy for the company going forward. Finally, the search for our permanent CEO was underway with an executive search firm retained and now active on the file. Moving on to the presentation, I will in three slides briefly cover our short-term strategy and the corporate and ESG highlights. So, turning to Slide 4 on the deck, top of the list predictively is returning Öksüt to normal operations through the completion of the modification reagent and obtaining all regulatory approvals for the restart. This is closely followed by continual optimization of operations at the Mount Milligan mine, an extensive mine site exploration. The recently completed LOM plan provides a stable platform for further enhancement, led by Paul Chawrun and his team. The Goldfields project in Nevada, purchased earlier in 2022, is being advanced with an initial resource estimate, incorporating ongoing drilling scheduled for mid-2023 for the feasibility study to follow. Finally, in light of improving molybdenum prices, we are updating our view on the molybdenum business unit, including the possibility of a restart of the company 100% owned Thompson Creek mine. Turning to Slide 5, in August of this year, we suspended leaching operations, wells continuing with mining crushing and stacking activities at our Öksüt mine. Prior to the cessation or the temporary cessation of leaching in the quarter, we had added approximately 40,000 ounces to the gold and carbon inventory. Application for the Environmental Impact Assessment, EIA, was made at the end of August 2002. Progress in advancing the EIA remains in accordance with plan with a public meeting conducted and completed November 1. We expect the completed submission by year end. Mercury abatement addition to the ADR plant, remain on schedule, with completion by year end and anticipated final costs of approximately $5 million. The resumption of active leaching and reactivation of the modified ADR plant is planned to follow shortly thereafter – that’s thereafter, the approval of the expansion EIA. In early October, Centerra announced details from new life of mine plan for the Mount Milligan mine, which Paul will highlight later in the presentation and the full technical report will be released today. In early October, we also announced a non-course issuer bid, NCIB program, to purchase or cancellation up to 15.6 million shares at 7% of Centerra’s total issued and outstanding common shares. We plan to commence utilizing the NCIB to purchase shares before year end and have established an automatic purchase program for periods for which management is under blackout. I am pleased to report that the Goldfield project advancement continued in the third quarter. The resource expansion and infill drill program is targeting over 65,000 meters of diamond drilling and reverse circulation drilling. As previously mentioned, our plan is to issue an initial resource estimate for the project in mid-2023 with feasibility study around year end. In addition to my appointment, we also appointed Paul Chawrun as the company’s new Chief Operating Officer in the third quarter and he officially started with us in September. At the Q2 meeting, the Board granted a quarterly dividend of CAD0.70 per share and this is the 12th straight quarterly dividend. Turning to Slide 6, there is a number of ESG updates on the slide. I won’t go through them all. But I will note that we published our 2021 ESG report in the third quarter. Additionally, in the third quarter, the company continued to demonstrate that safety remains Centerra’s top priority, achieving 1 million hours milestone without a lost time injury at the Öksüt mine. I will now pass the baton over to Paul Chawrun to walk through Centerra’s operational highlights for the third quarter. Over to you, Paul.

Thank you, Paul. On Slide 8, we have the operating highlights at Mount Milligan for the quarter. Mount Milligan continues to be a low cost mine, as you can see, with our quarterly gold production costs at $729 per ounce and all-in sustaining costs on a byproduct basis at $615 per ounce. The total gold produced for the quarter was a little over 54,000 ounces and copper was 19 million pounds. The operating plan remains on track for year end projections with the quarterly total material movement at 11.9 million tons and ore mined at approximately 5.3 million tons. At the plant, quarterly ore throughput was 5.5 million tons and that included a major shutdown in September. Both the mine and the plant are on track for record annual production. The copper head grade was 0.2% and the recovery was 82.4%, with the gold grade at 0.47 grams per ton and recovery at 66.2%. Copper grades are lower primarily because you are starting to feed a higher proportion of the high grade gold, low grade copper ore, or HGLC, you will see in the technical report, which will continue for the remainder of the year and into the future. Installation of the stage flotation reactors were completed earlier this year. This quarter, we have demonstrated the benefits with elevated copper and gold recoveries in tandem with increased throughput and the periodic blending of low grade copper ore. On Slide 9, we provide the operating results for Öksüt. As the company has previously reported, the ADR plant gold room operations have been suspended since March of this year. Mining activities have continued through the quarter, including ore recovery, crushing and stacking. Approximately 1 million tons of ore was stacked at a grade of 1.96 grams per ton for over 63,000 ounce – contained ounces placed onto the heap leach pad. Waste movement was reduced during the third quarter, the extent of further mining activities for the remainder of the year are currently being evaluated, while the plant remains suspended. For the period that the plant was partially operating in the quarter, the total gold stored in carbon inventory increased by approximately 40,000 to 45,000 ounces, bringing the total gold in carbon inventory to over 100,000 ounces. Progress and advance in the EIA remains in accordance with plan, including the public consultation meeting recently held. The update due to the ADR plant will include the mercury abatement addition and is progressing on schedule with mechanical completion expected in December and cost to be about $5 million as expected. Moving on to Slide 10, our year end production guidance remains on track. Copper production is expected to be between 70 million and 80 million pounds, with gold production expected to be on the lower side within the range of 245,000 to 265,000 ounces. Gold production from Mount Milligan is expected to be on the low end of the guidance range from 190,000 to 210,000 ounces, primarily due to localized adjustments to the oxide transition zone on the current bench in the higher grade gold areas which were observed in October. Please see Slide 11 for the highlight to the Mount Milligan updated life of mine plan and reserves. In early October, we released that the proven and probable reserves at Mount Milligan were increased by 1.1 million contained ounces of gold and by 260 million pounds of contained copper. This provides for an increase in mine life by over 4 years to 2033. The current life of mine payable gold production is 1.9 million ounces. This produces a net cash flow of approximately $640 million at $1,500 gold and $325 copper, with significantly higher cash flow at the current spot prices. The total capital cost is $494 million with the majority for the continued construction of the tailings and waste storage facility and the replacement of mine mobile fleet as it ages. Recent inflationary cost pressures seen over the duration of 2022 will be taken into consideration when we issue the 2023 cost guidance. Exploration potential exists both near the existing pit limits and nearby on the mine lease. We have drilled approximately 50,000 meters since the resource cutoff date and plan to continue drilling for the remainder of the year and into 2023. And now over to Darren who will go through the quarterly financial results.

Thanks, Paul and good morning, all. For those following on the slide deck, I’ll be speaking initially to Slide 13. Centerra recorded $179 million in net revenue during the quarter consisting of the Mount Milligan mine and the molybdenum business unit. No revenue was recorded at the Öksüt mine. At the Mount Milligan mine, gross gold sales and copper sales were $68 million and $49 million respectively. In the quarter, Mount Milligan sold 56,245 ounces of gold and 19.6 million pounds of copper. As previously reported, the ADR plant is currently suspended. The Öksüt mine has no recorded gold sales ore production in the quarter. However, stored gold and carbon inventory has continued to grow in the quarter currently holding in excess of 100,000 recoverable ounces at September 30. The cost associated with the Öksüt stored gold and carbon inventory is approximately $440 per ounce, which has been capitalized as current assets within inventory. The recorded costs will only flow through the earning statement upon processing at the ADR plant. At the molybdenum business unit, approximately 3.3 million pounds of molybdenum were sold, generating $61 million in revenue. During the quarter, the Mount Milligan mine operations average gold price was $1,204 per gold ounce and $2.49 per pound of copper. This incorporates the existing streams over the mine. Cash used in operating activities by operations were $17 million for the quarter and $35 million in free cash flow deficit in the quarter. As noted in the MD&A, the Mount Milligan mine recognized $33 million in positive operating cash flow and $21 million in free cash flow. As noted by Paul, another strong operational performance of the Mount Milligan mine, this was partially offset by higher production cost including diesel fuel, grinding media, liners, and equipment rebuilds. Some of these items were offset by the weakening Canadian dollar. Given no sales occurring at the Öksüt mine in the quarter with operations continuing, $23 million was used from our treasury. We expect a similar level of outflow in Q4. The net loss from continued operation was $33.9 million in the quarter, with $15.9 million in adjusted net loss recorded. The only thing in the quarter we are attributable to $28.2 million contributed from the Mount Milligan mine, $1.3 million loss from the Öksüt mine primarily exploration costs, and $1.4 million loss from molybdenum business unit. For the quarter, there were three adjustments. Firstly, the income tax expense of $20.4 million resulting from the impact of the weakening of the Canadian dollar on the underlying tax basis at both the Mount Milligan mine and the Kemess mine. Reclamation cost recovery at sites on Kemess maintenance is at $7.7 million and Kumtor related costs and other costs of $5.3 million. Now moving to Slide 14, I have largely covered off on most of the points. Just want to highlight a few here. The company has exited Q3 with a cash balance of $581 million and just under $1 billion of liquidity. The liquidity does not factor in the gold and carbon with a current market value of approximately $165 million. Given the ADR’s production capacity upon restart, we expect this to be monetized in a 3 to 4 month period. The Molybdenum business unit continues to implement its new streamlined business plan at its Langeloth facility, reducing inventories held and overall working capital to generate cash flow from operations of $7.2 million during the quarter. With improved molybdenum prices, the company continues to evaluate the strategic options for the business unit, including a potential restart of the Thompson Creek mine. Finally, given our strong financial position, the Board declared a quarterly dividend of $0.07 per share. With that, I will pass it back to Paul Wright.

Thank you, Darren. Because we wrap up here, I’d like to reiterate a few points. Our guidance is on track with strong cash flows at the Mount Milligan mine in the third quarter. We continue to make steady progress towards the Öksüt reopening. The KR deal was finally closed in the quarter. We have initiated a normal course issuer bid. And lastly, we have issued a new Mount Milligan Technical Report with an updated life of mine that highlighted the mine life extension and increased reserves. With that operator, please open up for questions.

Thank you. [Operator Instructions] Our first question comes from the line of Trevor Turnbull with Scotiabank. Please proceed with your question.

Yes, thank you guys. I wondered just with respect to the dividend that you just paid out this quarter, if we should expect that to continue while we are waiting for Öksüt to resume production and sales given that you have got significant cash reserves?

Yes, Trevor, I will sort of answer that. I mean, presently, I think that would be not unrealistic assumption. Obviously, the Board review management’s recommendation on a quarterly basis as it relates to dividend payment and that’s the qualification I provide in any situation.

Sure. Okay. And then the only other question I had was, you mentioned having visited all the operations and I know that COO, Paul Chawrun has also had a chance to see everything. In addition to your comment about being pleased with the teams that you have in place already is there any other first impressions that either of you could share about operations for – or opportunities per se change going forward?

Paul, hand that over to you so.

Yes. Thanks, Trevor. I think just in general these are great assets. So it attracted me to the company in the first place. We have an excellent balance sheet. We will put these – put the optimization tests to all these assets and as well the Moly business unit has strong potential as well. We will be looking at a lot of those details. And I think Centerra is poised for excellent growth going forward. I think it’s one of the best stories out there once we get some of these current issues behind us.

Yes, so – go ahead Paul.

A little bit of color as it relates to Turkey. I mean obviously, we have had some issues in Turkey. And some of those we certainly have to accept responsibility for. And I would say that the quality of the operating team now in Turkey is probably superior to what the corporation started with. Leaving without uncertain is up to the task to extract the maximum value from that investment.

Okay, sounds good. That’s all I had. Thank you.

Thank you. Our next question comes from the line of Anita Soni with CIBC World Markets. Please proceed with your question.

Good morning, Paul and Paul. And Paul Wright, good to hear your voice again, I just wanted to ask – it’s, I just wanted to follow-up on the permitting for the enlarged grazing land permit, and the extension of Öksüt, overall operating license. It says it’s set to expire in January. I mean if we are looking forward into next year reasonably, considering that we are in November now, should we expect that the mining would resume in January, or will it take more time for these permits?

Permits, it’s a bit asking how long is this piece of string. I mean we have our applications in for our permits. We understand that they are progressing through the system as we would expect. We can’t project accurately when we are going to receive those permits. We do not have a heightened level of concern about the outcome. And certainly, the pasture land permit would allow us to accelerate waste removal in parts of AI parts. And we would advance with those prior to the initial bleaching operations which are dependent upon the completion and approval of the of the new EIA.

Okay. And then I just wanted to follow-up. In the last disclosure, there was some disclosure in Q2, about I think there were a number of individuals in the mercury room that had had tested for higher levels of mercury. Can we get a follow up on that? I didn’t see anything in this MD&A.

Well, there is nothing further to comment in that regard Anita.

Alright. Thank you very much.

Thank you. Our next question comes from the line of Dalton Baretto with Canaccord. Please proceed with your question.

Thanks and good morning guys. I wanted to just ask about strategy and how you are potential new CEO? But I mean, when I look at the pipeline, you have got combat, which is a high copper component, as I talk about the Moly is that – all of that seems completely off-strategy to me. And I am just wondering, where do you Paul Wright, see this company going forward? And what kind of attributes and background are you looking for as new CEO? And will you be prepared to pull the trigger on any strategic mandates ahead of having someone in the chair? Thank you.

Yes. I mean there is a number of different questions, not all of which I think I am probably the appropriate person to answer. I mean I am an interim CEO, the process to identify and secure a new CEO is probably a four-month to six-month period of time. My focus is really on stabilizing the operation and ensuring that we have an appropriate platform that’s on strategy in terms of allowing the new CEO to grow a very successful business. And I certainly see that as the opportunity as it relates to any type of possible transaction. I mean I can’t say that that’s a high priority at this stage, but nor would I completely preclude it, because you are never going to determine when a possibility may turn up. That might make some – a lot of sense. But I think it’s highly unlikely given that as I have said, I am an interim CEO.

Okay. Thank you for that color, Paul. And then maybe switching to the operation, particularly permit on Öksüt, so, presumably, the EIA review is going to take a little bit of time into the New Year. The operating permit expires in January. Even if you get the enhanced grazing permits ahead of time, can you actually start doing anything if your operating permit expired, and does your operating permit remain contingent on the EIA, are they…?

The operating permits or the renewal of the operating permits is a separate item. And we would anticipate that to be obtained in advance of the existing operating permit expiring. And with that at hand and the pasture land, we would continue with our normal mining operations limited to sort of mining prior to the granting of the EIA, and the ability to restore.

Right, that’s all for me. Thank you.

Thank you. Our next question comes from the line of Brian MacArthur with Raymond James. Please proceed with your question.

Hi. Good morning and thank you for taking my question. I would just like to follow-up a little bit more in the Moly strategy. And a couple of questions following up on Dalton, would you go ahead and proceed with that a new CEO on that strategy if you decided to reopen the Thompson Creek Mine? And I guess my second question is, what needs to be done there? And my third question is, I think Sojitz, but one time had a partnership and had claim on the ore or whatever. Can you just go through with a little more color about why it would be doing that, as opposed to, historically sort of talked about selling that operation – those operations.

Yes. Look I couldn’t deal with the front part of those questions. And Darren, perhaps you can deal with the last element, because I am not quite familiar with Sojitz or these sorts of people. Look, I mean we are in the phase of really pulling together the information and generating additional information, identifying what additional work needs to be done as it relates to technical studies, to put ourselves in a position where we can critically assess the options that are available to us. Win the Moly business, particularly in the context of what we have seen as strengthening Moly prices. It is not – this is not an imminent decision making process. And certainly it would not be – it would be unlikely that we will be making any significant decisions on the Moly business prior to a new CEO, who would obviously take ownership of those decisions. So, that’s the decision most likely made by my successor. But I think it behooves us at this point, to have a more fulsome understanding of what indeed are the options for the business and whether or not ultimately the company decides to push forward the ways off.

And just to clarify a bunch of this. The Thompson Creek Mine is 100% owned by Centerra, which is the mine under review. The Endako mine is the 75% owned by Centerra and 25% owned by Endako and that isn’t being progressed to the same extent as the Thompson Creek Mine.

Great. Thank you very much.

Thank you. Our next question comes from the line of Lawson Winder with Bank of America Securities. Please proceed with your question.

Hello. Good morning and thank you for the update. I first wanted to ask about the sustaining CapEx guidance, which was reiterated for 2022. With the implication being a pretty substantial step up in the fourth quarter, would be helpful if you could just walk through some of the items that are driving that spend. Thank you.

Yes. Hi. So, it’s Darren here. I think we – if you look at the guidance, you actually know that it’s we do note that it’s going to be at the lower end. So, it’s, there is nothing significant individually on that. But we do expect to be more on the lower end. If you look at our disclosure in the outlook comparative between year-to-date and going forward, you will note that specific guidance, but there is nothing of real substance in there.

Okay. Even the low end is higher, but I guess what you are saying is just a mix of things?

No. There is nothing one – there is no individual, Öksüt flagged as no. We did the big shutdown in Q3 for Mount Milligan. So, we are not expecting any large shutdowns in that quarter. So, yes, it’s just really just business as usual would sort of call it catch up from the 2022 guidance.

Okay. I also wanted to ask about the Mount Milligan costs. So, we are expecting an update on ‘23, 2025 operating costs when you release your guidance in January. Could you give us an idea of where cost per ton was in Q3, particularly, both on the mining side and on the milling side? And then sort of where you are seeing inflationary pressures and where there might be offsets, for example, like with the Canadian dollar? Thanks.

Okay. I will take that. Yes. So, I will just go through the numbers. So, the mining was $202 per ton mine, plant $552 a ton and admin was $237 a ton. And then in terms of comparing that to the LOM, that LOM was done earlier in the year. And as with everybody in the industry, we have seen cost increases on fuel, plant consumables, supplier parts, tires, in the range of I would say about 5% to 20%. So, we will take that into consideration when we issue our 3-year cost guidance early in the New Year.

Okay. That’s very helpful. Thank you.

Thank you. And there are no further questions at this time. I will now turn the call back to you. Please continue with your presentation or closing remarks. End of Q&A:

With that, I would like to thank everyone for joining us on the call today. There will be no further comments. Thank you very much.