Eldorado Gold Corporation (EGO) Q2 2010 Earnings Report, Transcript and Summary

Good morning ladies and gentlemen and welcome to the El Dorado Gold Corporation second quarter 2010 financial results conference call. This call is also being webcast is available on the El Dorado Gold Website at www.eldoradogold.com I would now like to turn the meeting over to Miss Nancy Woo. Please go ahead Miss Woo.

Thank you operator. This presentation includes statements that may constitute forward looking statements or information. Any forward looking statements made and information provided, reflect their current plans, estimates and views. Forward looking statements and information which include all statements that are not historical facts are based on certain material factors and assumptions are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated again or suggested by the forward looking statements or information. Consequently undue reliance should not be placed on these forward looking statements and information. The information contained in our annual information form and in our annual cordially management’s discussion and analysis available on our website and on CEDAR, identified factors and assumptions upon which the forward looking statements or information are based on and the risks, uncertainties and other factors that could cause actual results to differ. All forward looking statements and information made or provided during this presentation are expressed, qualified of their entirety by this cautionary statement and the cautionary statements contained in our press release dated July 29th, 2010. I will now turn the call over to Paul Wright, President and CEO of El Dorado Gold.

Well thank you Nancy and good morning ladies and gentlemen and welcome to the El Dorado Gold second quarter financial and operating results conference call. Joining me this evening in Beijing are Norm Pitcher, Chief Operating Officer and Ed Mui, Chief Financial Officer and you’ve just heard from our VP of Investor Relations, Nancy Woo who’s in Vancouver. We will continue with our customary program with Norm providing commentary on the operating performance and the outlook for the company. Followed by which, Ed will review the quarter’s financial results and then we’ll open up for questions. But before doing so, I would like to make a few brief remarks. We continue to be very pleased with these results. A strong performance from our mines delivering a 1,67,940 ounces, at an average cash cost of to $357 per ounce, has enabled us to firm up and upgrade our guidance for the year to 6,25,000 ounces at $375 an ounce. El Dorado continues to distinguish itself through continued deliverance into its stated plan. The strong operating performance has enabled the company to report net income for the quarter of $60.5 million or $0.11 cents per share for the period. In the quarter, we completed the acquisition of all the shares of Brazauro Resources Corporation that we did not own, allowing the company to push forward now for the development of the Tocantinzinho project in Brazil. While we look forward to delivering a full feasibility a year from now and being in a position to make a construction decision by year end 2011, our development and exploration programs are progressing largely in accordance to plan and Norm will provide some commentary on the individual programs momentarily. I am particularly pleased to see the significant improvement in production and costs from our three mines in China where productions has jumped from 82,688 ounces in Q1 to 97,489 ounces in Q2 and where we have seen a significant cost reduction in all three mines between the quarters. I would like to thank all of our employees and all of our contractors for another great quarter and we look forward to the balance of the year. I will now hand over to Norm who will provide some additional color on the operations and outlook for the balance of the year. Norm?

Thanks Paul and good morning everyone. Why don’t we start on the operation side and we’ll go to Kisladag first, another great quarter there. We produced 70, 451 ounces or $304 per ounce and placed $2.7 million tons of ores on the leach pad at the rate of 1.12 grams per ton. Our strip ratio about 1.55 to 1, very close to micro mine average. We’re obviously very pleased with the operation of both the mines and processing circuits at Kisladag and we’re now in the process of looking at IT heap recoveries in light of the good production we’ve had in the first half of this year. At Jinfeng in China, we produced 52,659 ounces and 381 per ounce and milled 392 ounces of ore, tons of ore at 4.51 grams per ton at the open pit produced 335,000 tons which is a little bit above budget and we did 97,000 tons from underground which is pretty much bang on budget. Strip ratio was a little bit lower than the year average, was 12.6 to 1 as we concentrated on ore ahead of the rainy season, which is we are in right now at Jinfeng. Recoveries there are averaging about 1.5% above budget so far and just as a general comment, now we’ve got sort of six months operating under our belt at Jinfeng and I’m quite pleased with the progress we’ve made in both the open head operation and the underground and also just started to get a handle on the overall structural setting of the ore body controls and their mineralization etcetera. Tanjianshan had another good quarter; we did 28,880 per ounces at 387 per ounce and that was milling about 272,000 tons of ore at 4.4 grams per ton. The mine is now back up to…

Thank you, Norm. Good morning ladies and gentlemen. Although our continued strong operating performance in the second quarter resulted in good financial performance as well. Starting off on the balance sheet, June ending assets balance increased by approximately $47 million from first quarter end’s balance and $97 million from 2009 year end, mainly due to increases in cash and capital investments. Total cash balance at June month end was $359 million, an increase of $24 million in the quarter and $44 million from last year’s end. The year-to-date cash increased principally derived from operations; proceeds from the sale of an assets plus cash generated from exercise of share auctions. This was partially offset by $95 million of capital expenditures and a $50 million bank loan prepayment in China. As of the end of June, total liabilities amounted to $725 million, a decrease of $44 million since the year end as the result of the bank loan repayment in the second quarter I just mentioned plus payment in the first quarter of transaction fees related to the Sino gold acquisition, which were accrued for at year end last year. Moving on to the statement of operations and retained earnings, this year second quarter’s gold sales revenues of $206 million at the year-on-year increase of $126 million or 258%. For the first six months, the year-on-year revenue increased was $256 million or 294%. The significant increases were accounted for by production increases in both the Kisladag and Tanjianshan mines, coupled with the additions of Jinfeng and White Mountain from the Sino Gold acquisition. In other contributing factor of cost with the high gold price, which increased from an average of $920 per ounce in the first half of last year to $1154 this year with the highest production in the Sino Gold…

Thanks Ed and thanks Norm for those comments and descriptions. Operator, we are now ready for questions please.

Thank you. (Operator’s Instructions) The first question is from Steven Butler of Canaccord. Please go ahead. Steven Butler – Canaccord: Good morning Paul, Norm and Ed, thanks very much. Question for you on Efemcukuru in terms of underground access and the portal efforts just starting, does that give you a sense of timing Paul on start-up of the operation from a milling point of view? Is that a Q1 event next year still or perhaps slightly delayed?

We’re a bit later starting than we originally planned Steve, I think you probably have to bear with us for this quarter. We’d like to get a quarter of experience underway with the contract before we firm up on specific start up in 2011.

Right

We are obviously working. We got some flexibility in the mine plan and we are going to work on that to try to stick as close as we can to the schedule we described for next year but I think, as I say, just give us a few months to get the contract there up in the running and lets sort of see what sort of productivity gets then I think we can take to start up a bit more accurately but there has been some slippage

Great, okay. Paul or Norm, the Kisladag, is there expectations of other, are you thinking about an interim resource update throughout the year or is it wait to completion of the full year program at Kisladag?

No I don’t think we’ll wait Steve. We are in pretty good shape in terms of modeling and it’s not a big deal for us to update the model at this point. So we’ll go ahead and do that and update the resources here pretty quickly.

Okay. Sense of timing error, I am not going to pin you down again or –

No look out I mean I mean, its Paul. I think what Norm and I have discussed on this is as we described, we’ve got the bulk of the drilling done. It’s quantifiable, I think it’s safe to say in the next little while measuring

Next little while?

And the peaks, no and in the next couple of weeks, you are going to see a new resource system out of this. Its going to take us a bit longer to convert those into reserves largely because we would like to get this metallurgical test work behind that we are seeing some signs of improved recovery. As this ore body gets larger, we want to frankly spend some time looking at whether or not we should be moving to some larger equipment given the scale of this operation which obviously impacts on unit costs, which in turn, impacts on reserves. And so, there’s some engineering work that we’d like to do before we take these resources and move them into reserves. So you will see us coming up with an interim resource statement fairly shortly as I described and then probably a few months later a new reserve statement which will include what I have described as well as probably some more drilling Norm and the crew deem that appropriate. Steven Butler – Canaccord: Okay and thanks Paul

Thank you. The next question is from David Haughton of BMO Capital Markets.

Good morning and thank you very much for taking the questions. Looking at Kisladag, perhaps Norm, pretty good grades, they are hanging in about the 1.1 gram level. Do expect that kind of grade to be around for the balance of the year?

Yeah, we do. This is the pretty consistent ore body and we honestly don’t see a lot of variation grade. I mean, you go from sort of 1 to 0.95 to 1.15 and then you go back to 1.1. So it will probably stay right above where it is the rest of the year.

And you’re also talking during your commentary, Norm, about improvements on the recovery ratio. What kind of targets do you have for that and when would you expect for that to be achievable?

Well we don’t have a target. I think that’s why we are doing the test work. As you can appreciate it and a (heat reach)[10th file – 1:46] of this size recovery is not a simple issue, considering we also haven't closed up any pads yet. We’re continuing to leech really on all of the cells, but we are running a lot of our borrowers and column test and we’ll be updating that for the end of the year

With that thought in mind, do you have any consideration of putting into inter-lift liners in?

Not really, number I mean we’ve got there, the pads are fairly high already. So and we got enough room to the North and I don't think we really need to go that route

I would say definitely not because what we are experiencing potentially is the opportunity to get higher recoveries due to lead cycles which were well beyond what you would do when a contest. Put inter liners in frankly, your eliminating some of the potential benefit that come through.

Lining up the occupancy.

Okay.

I mean we’ve experienced no difficulties at all in terms of percolation as these lifts have got higher, so now we’ll keep them open.

So taking advantage of the long leech tail in other words?

Exactly.

Looking at TJS, the grade there is looking pretty good in the four plus kind of category. What's your expectation for the balance of the year?

We will probably come off that a little bit but you know I think that will keep up the 4.1 gram range. I think I am kind of challenge as we’ve got a lot of stock piles built up from the West, so the grade and we’re not necessarily dependant on the grading coming out of the pit. We can alter stock pile also. It’s quite easy to sort of keep the grade of what we forecasted for the year, which I guess just over 4 grams.

And the other offset that is recovery, just backing out what the recovery may have been, I didn't see it steadily anywhere, was around the 73%-ish level? Target, I understood was up around the 80% level. What are you shooting for, for the balance of the year there?

I think we are higher than, we should up like we’re up around 77 – 78% recovery. That’s total recovery.

Is White Mountain or Tanjianshan?

TJS

But on the topic of recoveries, it looked like a pretty good result there for Jinfeng.

Yes

Previously it was running in the low 80s. It looks like you are at least in the high 80s now. Do you expect that to be something sustainable?

Yes, no I think we are up around 86 % now and which is a little bit -- it’s a good percent now better than what we’d expected and yes I won’t see any reason why that would change.

And one of the other things I’ve noticed Jinfeng is that the depreciable rate on average for the year-to-date has seemed to step up to about the $250 per ounce range and it maybe, is that something that we should be think about going forward?

I am sorry can you repeat that? Jinfeng The depreciable rate, the dollar per ounce depreciation, D&A rate on average for the first half was about $250 per ounce, is that something that would be considered going forward?

Yeah but that’s about the rate that we expect going forward yes.

Okay and Eastern Dragon, just wondering about how much we spent during the year-to-date and what your target is for the balance of the year?

For capital?

Yes please

Yes its not much on capital. It’s minimal at this stage to work. We are frankly finishing off the permitting process David.

Okay. And with that permitting in mind and its going to be an important part of your timeline, when do you see this is coming on stream to contribute production?

Well, we still think next year. As I guess, as is the case of Efemcukuru, which can give us a little bit of time here and we will update. It’s going to depend of course when we start. It’s a fairly, we think we can ramp up construction by quickly and there has been some work done already by Sino onsite. So, yes depends on the timing of permits.

I mean, in the case of Efemcukuru, its depended upon the outlook, the level of productivity we get out of the underground development in the case of Eastern Dragon, it’s frankly when we have the remaining permits and if you get started, then we confirm up on when we expect to finish, I mean in Eastern Dragon, we are in good shape in terms of engineering and procurement. Our approach to when you start construction, shall we say somewhat different to our predecessor.

This thing that you mentioned Efemcukuru, you've got a little bit of slippage on-time here. Do we have a commensurate increase in CapEx from what you're seeing at the moment?

No, I wouldn’t say so. No it’s a simply where we have been a bit delayed getting started on the underground development. I think any increase in capital will be very, very modest.

At this point, we're not projecting any increase in CapEx.

Okay, thank you very much.

Thank you. The next question is from Barry Cooper of CIBC. Please go ahead.

Hi good morning. Just wondering on Tocantinzinho, what is going to be the change on your pre-feasibility expectations vis-à-vis the kind of, I guess the soft scoping study, if I call it that, that was done by Brazauro or earlier, are you changing much there in terms of throughput or anything else like that?

Not really, I mean no. The concept is the essentially the same in terms of the open pit where facilities are users sided, power line, road access is not really much different than that what was there before. I mean it will be a more detailed mine design; we are going to start doing some combination drilling facilities here shortly. You know, is there everything we need to do it actual for a preface but the concept is very similar. Barry Cooper – CIBC: Yes, okay. I just wasn't sure whether when you got your hands on it whether you kind of say, "Okay, well, let's put it into an El Dorado form and the El Dorado form is not the same as what they have admission when they originally did that scoping study a couple of years back. But obviously the numbers will be updated and everything else liked that.

Yeah, I mean the scoping study was there study. This will be our study and will be done to pre-feasibility standard so that we can stand by them in terms of first reserve statement. Clearly the scoping study that was produced by Brazauro stepped off our combined views as to what was an appropriate scale of project. We don’t necessarily have to expect the same financial results in terms of capital and operating cost as Brazauro because again, it will be our engineering study as opposed to theirs.

Sure, and then, flipping over to Turkey with some new mining laws that got passed there last month, has there been any kind of action with respect to acceleration of permitting or the granting of permits at this point in time?

Yes there has been and certainly one of the things that’s occurred is that we can do bar street [ph] permits again. So, that’s on our exploration where we are looking at now being able to permit our drill site and rolls. I can’t really comment on the other folks doing this in the center Barry Cooper – CIBC: Right. Just wondering you've got your permits then for the underground, there is no real change in, I guess the law vis-à-vis what you could have done six months ago compared to what you can do now?

No I mean the changes in the mining law don’t affect the permits that we have for the construction of Efemcukuru are the same permits, the mining doesn’t affect that. What the mining law does effect is ultimately the final permit that is required for us to start operations is now being shifted back to central government as opposed to being in a simple level, that’s the only change for Efemcukuru. Barry Cooper – CIBC: And then when does that final permit get granted though?

Well when we have – basically when we start up Barry Cooper – CIBC: Okay. So, it's kind of the last turnkey thing where they say okay, we have done an inspection on whatever thing and everything is copasetic and here you go.

Yeah exactly. We started to essentially start the mine off and then they come in and ensure that we are operating in compliance with the EIA and the conditions that are specified within EIA. Barry Cooper – CIBC: Right.

It is identical to all we did in [indiscernible][15th – 1:34]the only difference is again that permit is now granted at central government level where the rest of the permits are granted as being sort of an out liner you know granted at the municipal level. Barry Cooper – CIBC: Then right on the, I guess, your guidance is now popping up but the top end your range for the production levels, the lower end of the costs. Is that primarily all related, if I were to simplify it, mostly all to Kisladag given that you are probably about 65% or 70% of your original guidance for Kisladag already with six month under the belt?

I think we would have said that in the first quarter but I think in the second quarter, we’ve seen as I commented in the call, a significant improvement on the cost from the Chinese operations. So, to the extent that continues through the year, I think you will see the overages as being a combined contribution from all the mines really. Barry Cooper – CIBC: Yes, I think the original guidance was $230 to $240 at Kisladag near $153 for the six months, which suggest on an annualized basis you would be over to $300 there.

Barry, you are trying to get us into guiding for the quarter, we are not going to do that. Barry Cooper – CIBC: So let me ask in a different way. The second half I suspect will be a little bit weaker at Kisladag than the first half?

That's your suspicion. Barry Cooper – CIBC: Ok fair enough, thanks

Thank you. The next question is from Kerry Smith of Haywood Securities.

Thanks operator. Norm, just for TJS, they rose to performance. How has that been now that you've had it operating for a little while, is it pretty much running out of budget in that design?

Yeah, I know it’s going pretty well Kerry and it's very close to budget recoveries and we are not really having any issues at the asset plant. It's a complicated piece of machinery, so there is always something going on there but I think from starting here on now to Tanjianshan, we are optimizing the performance of that circuit but no major issues.

And the drilling on the 323 zone, is that now finished like have you fully closed off that zone or does it still remain open in any?

No. We sort of closed off the main part of it, then we started the modeling and the resource calculation on now but we still have some indications along Strike, especially up towards QLT, the first thing we’re buying there. So no it’s not closed off but we got it and we have enough drilled now that we can go ahead and run a resource on it. So that’s what we’ll do.

And when would we see that resource do you think?

Should come up in this quarter, Q3.

Okay, is that going to come out, let's say, within two, three weeks with the Kisladag resource or will that be a separate?

No, that might be a separate one.

Okay.

I don’t think its too far behind but I don’t figure making the Chrysler one. We’ll probably try to wrap it up into a bit of a general update on the exploration.

Okay and then just for Eastern Dragon, the permitting that you have to complete before you can actually start construction, do you think you will get that permitting done, is that something that's going to happen in the next couple of months that you can get mobilized on construction before it gets too -- or the weather gets too miserable or is it not really that bad up there?

Let me get a, no you get a pretty good winter up there. I mean, you sort of very Northern Ontario type winters. Yes, I mean that’s sort of a time frame is that we are hoping for.

Okay. So you are hoping for permitting to be wrapped up in the next couple of months I must say?

Yes and then to be able to start sort of before it starts to get end to winter.

Right. By October, be in construction or ?

Yeah.

Okay. And then four the PEIA at Perama, have you heard any feedback, because this has been issued to the government or been delivered to the government. Has it had any feedback from them in terms of issues that have been identified or things that they are concerned about or what kind of feedback are you getting from them, and when do you think you might actually have that PEIA approved?

Kerry, lets look at it this way, there’s been no feedback that would suggest anything that we’ve submitted is problematic. As you appreciate in Greece right now plotting progress to somewhat difficult, we are still taking the view and working on the basis that we are going to be in a position to have the PEIA behind us at the part end of the year and have our full PEIA submitted and the things change then we will tell you, but its one of these situation where there really is no milestone between now and getting pre EIA.

Okay. And then just one last sort of general question Paul and Norm, just on Kisladag because it's running extremely well for you, and I am just wondering strategically what other things you could do there to sort of incrementally improve the operation or have you kind of got most of the operational efficiencies that you think you can get?

Yeah now we are looking at the expansion and we are doing expansion right now. I guess up to 12 and 12.5 million tons per year. This sort of volume hasn’t been drilled out yet so I think we’ll probably do another drilling program this year, if not, certainly next year and as it keeps getting bigger, it certainly changes from what we originally had as a project there in the EIA. We are going to start and stack bigger equipment as well because pits are going to get deeper in the pit and one way to offset the cost is to go to larger equipment. As part of the reason Kerry why we’re delaying frankly on getting this reserve out is because Norms described previously I mean we’ve seen what we think we are seeing better recoveries. We are certainly seeing more ounces here and it may very well be that there are opportunities to scale this project up, and that's something that we said all the way long the line, I mean the expansion that Norm has describe to something we committed to almost a year ago now and that’s underway and that in a along way in parallel with that obviously we’ve made other improvements counter current leaching expanding the size of the carbon columns and we are benefiting from that as we go forward. So there is various ways it means and which we potentially can enhance this operation.

And then just on solution management generally if you are, that's going to get to be a bit more of an issue, is there anything there that you can do to keep the cost reasonable or do you think that will be a problem at all?

I don’t think so, I would say it's still away, I think as your pads get larger it creates greater flexibility in how you manage your leach pad. We have increased our pond capacity and again, having now the pond capacity in the area that extend open for counter current leaching it gives us currently more flexibility to manage solutions. We are able to store more solutions, accumulate more solutions in the wet months and keep those available to us for the dry months and as you probably noted, you haven't heard us complaining about problematic leaching cycles in the summer for the last two years and that’s partly because as this is scaled up we just have more flexibility.

[Operator Instructions] The next question is from Anita Soni of Credit Suisse.

My question, and congratulations on the good quarter, my question is with regards to unit cost improvements at the Chinese operations. Could you talk a little bit, Norm, about any particular areas that you are seeing any unit cost because how my calculations are coming down?

I think we are doing and we are doing a little bit better and Chin con we are doing a little bit better both in the (inaudible) and underground. I would say the same thing as well at this quarter the (inaudible) in anyway, as I mentioned (inaudible) I think he improved its now going forward going to be more in the – that the mine is we understand that quite well as mining contract is (inaudible) premature control there, I think the imprudence what we see on the plan side.

And then, in terms of

Here we got to the sixth, we got there six months under our (inaudible) at the new operations and I think we have done really well with them.

And then, in terms of Jinfeng grades, I know you are running a little bit below the guidance. Do you expect that to come up, for the full year guidance?

Yeah, we shouldn’t be much below guidance.

I think it was like 4.96, you are running 4.5 right now.

Yeah. (inaudible) mark a little bit I don’t think it will be to much.

Okay. And then, just

Let me take a look at that.

Okay. And then, just, I missed the split when you told us what the underground tonnage and grades with Jinfeng?

I didn’t give a grade, just about 9- just about 100,000 tons underground which was (inaudible) and the grade is probably above 5 grams.

Okay. And then, lastly, on the exploration spend, seems a little bit below the $30 million you guided for the year on a run rate basis. Do we expect a lot of spending in the second half of the year?

Yeah, I think we will, I had weather or not we catch up to the 35 maybe not right now but certainly we are just getting here we are just getting growing (inaudible) with the change in the mining wall now drill the four projects we are working on and the same thing in china we are just starting to get going there and relatively we are going to be redoing the budget for (inaudible) in brazil so be some additional, probably some additional spending that was is counter 40 regional 35.

And the last question, the throughput right now at Tanjianshan is running above 1 million tons per annum if you look at the quarter. Do you expect that kind of strong performance to continue or trending more towards the 1 million tons per annum?

Trending more towards 1 million tones per annum that’s what I like (inaudible)

Yes, okay. All right, thank you very much. - Credit Suisse: Yes, okay. All right, thank you very much.

Thank you the next question is from Steven Butler of Canaccord. Please go ahead. Steven Butler – Canaccord: Guys, just a quick question to clarify Kisladag has historically been tracking a royalty or a difference between cash and total cash costs of about $2 an ounce and it bumped up to $41 per ounce spread in Q2. Is this new mining law a part of that or anything explains that bump in total cash cost above cash cost at $41 an ounce in Q2?

What the new mining law ether was (inaudible) royalty being increased from 1-2% and that sounds late into our current out phases for $3 to $6 per ounce, now the new royalty rule however is not clear whether its going to be retroactive to January 1st but what we did was pretty conservative we accrue for it in June going back to our retroactive January 1st and so that was in the quarter, that was accumulative impact one in the second quarter by going forward to the royalty increase is $3 per ounce more and I’ll going up from $3 per ounce before the new law to about $6 per ounce. So there was cumulative impact one-time that hit the second quarter.

You mentioned $3 to $6 an ounce at 2% royalties and 2% of the gold price which is that $1,200, are we now talking about more like $24 an ounce going forward or am I missing something?

That the 1% it was on a per ounce basis or it’s about $2.

If I can just step in here Steve, Ed, I think you actually are close because what our understanding of the new royalty is it's essentially going to be a 2% NSR, and so you are right Steve, I mean, at 2% NSR would translate to around $24 an ounce. The previous royalty was a 1% royalty, but it wasn’t in NSR, it was more, it was closer to some form of net profit royalty. There is a sizable gap and I can't, and maybe Ed, you have what 1% would represent but as Ed described, we are not certain right now whether this is going to be applied as of January 1, 2011. July 1st and so we've taken a conservative view and said, okay, what's the worst case ends up being retroactive to the beginning of this year, let's take that it now in this quarter and if we are ultra conservative so be it, we will rectify that when it's clarified.

So we have an upside by the end of the year when we know whether it’s going to be applied retroactively to the beginning of the year. If it isn’t, then we will flow back what we have accrued.

But if you assume, the worst case is 2% which is $25 less whatever the amount was based on the 1% essentially a net worth. Steven Butler – Canaccord: Right, okay. Thanks Paul.

Okay.

Thank you. Ther are no further questions registered at this time. I would like to turn the meeting to Mr. Wright

Thanks operator and thank you everybody who was on the call and look forward to talking with you a quarter from now. Have a good day.

Thank you. The conference is now ended please disconnect your lines at this time and we thank you for your participation.