Eldorado Gold Corporation (EGO) Q4 2010 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Welcome to the Eldorado Gold Corporation 2010 Fourth Quarter Financial Results Conference Call. This call is also being webcast and is available on the Eldorado Gold website at www.eldoradogold.com. I would now like to turn the meeting over to Ms. Nancy Woo. Please go ahead.

Thank you, operator. This presentation includes statements that may constitute forward-looking statements or information. Any forward-looking statements made and information provided reflect our current plans, estimates and views. Forward-looking statements or information, which include all statements that are not historical facts, are based on certain material factors and assumptions and are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in 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 our annual quarterly management discussion and analysis available on our website and on SEDAR identifies 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 expressly qualified in their entirety by this cautionary statement and the cautionary statement contained in our press release dated February 18, 2011. I will now turn the call over to Paul Wright, President and CEO of Eldorado Gold.

Well, thank you, Nancy. Good morning, ladies and gentlemen. Welcome to Eldorado Gold's Fourth Quarter 2010 Financial and Operating Results Conference Call. Joining me this morning in Vancouver are Norm Pitcher, Chief Operating Officer; Ed Miu, Chief Financial Officer; and Nancy Woo, Vice President of Investor Relations. In a customary manner following a brief introduction from myself, Norm will take you through the fourth quarter operating results and then provide some color in terms of what you can expect operationally in 2011. Ed will then provide a recap on the fourth quarter financials, and then we will open up for questions. We are very pleased to have ended 2010 with a strong performance from all of our mines. With 148,000 ounces produced in the quarter, the company completed the year producing in excess of 632,000 ounces and a cash operating cost of $382 an ounce, while in line with our upwardly provided guidance in the year of 625,000 ounces at $375 an ounce. In the quarter, we made very good progress at Efemçukuru, with our Turkish mining contractor putting in an excellent performance in terms of advancing on three declines concurrently, and by year end, we had accessed the ore zone. Going into 2011, we are now on track to start processing ore through the mill early in Q2. Following substantive progress in the permitting of the Eastern Dragon project in China, we resume construction in the fourth quarter and are continuing through the winter. In Brazil, our Vila Nova Iron Ore Project started production in the fourth quarter, and by year end, we'd completed two shipments of lump and sinter. We're continuing operations into 2011, and we're extremely pleased with cash margins that now approximate $100 per ton. We entered 2011 in a strong financial position with an excess of $360 million of cash. We're looking forward to further production growth with continued low costs. The focus this year will be to ensure on-time delivery of new production from both Efemçukuru and Eastern Dragon. In addition, over the next 12 months, you will see us delivering plans associated with expanding production from our existing asset base, which will support our planned production growth to approximately 1.5 million ounces over the next five years from assets that we presently own and control. We are finishing up our year end 2010 reserve and resource estimates, which were delayed slightly to ensure inclusion of all drilling results in the year just gone by, and we expect to be releasing these results very early in March. Although not complete, it is clear that the company will have increased both its reserves and resources beyond depletion in both total terms and also on a per share basis. We have significantly increased our planned exploration budget to $54 million in 2011, and look forward to reporting on these on this progress. With that, I'll hand over to Norm.

Thanks, Paul, and good morning, everyone. As usual, I'll certainly go to the operations first and then on the development and then on to exploration. So let's start with Kisladag. At Q4, we sold 59,815 ounces, cash cost to $383. That gives us for 2010 274,592 at a cash cost of $329. We have provided our 2011 guidance, which is 270,000 to 285,000 ounces at $350 to $365 per ounce. A little bit higher cash cost in the quarter, mostly due to less ounces being sold, a little bit higher strip ratio. We had a little bit excess capacity because we reached our 10 million EIA limit on ore, as we mined a little bit extra waste and put a little bit less on the pad than usual. We have completed the recent metallurgical column testing program, which is now indicating average sulfide recoveries of approximately 65% versus 60% that was used in the feasibility study. Oxide remains the same at about 80%. The expansion of the project to 12.5 million tons per year is on track and is scheduled for mid-March start-up. At Jinfeng, we produced 37,560 ounces in Q4 at $486 per ounce. That gives us for 2010 181,950 at $425 per ounce, and we had given our guidance for 2011 at 175,000 to 185,000 ounces at $445 to $465. A little bit higher cash cost in Q4 at Jinfeng, mainly again due to less ounces sold. In this case, it was the result of treating some lower-grade material towards the end of the year. In 2010, we continued on a major underground drilling program, which will be incorporated into the resource and reserve update coming out in March. Jinfeng is a structurally complex ore body, but I think we made great progress in advancing our understanding of…

Thank you, Norm. Good morning, ladies and gentlemen. Starting off on the balance sheet. 2010 year ending asset balance of $3.78 billion increased by approximately $23 million in the fourth quarter and $340 million for the whole year, mainly due to increases in cash, capital investments and the Brazauro acquisition. Total cash balance at year end was $367 million, a decrease of $25 million in the quarter, but an increase of $51 million for the year. At year end, total liabilities amounted to $770 million, a decrease of $29 million in the fourth quarter, due primarily to bank debt reduction and essentially unchanged from year end 2009. Moving on to the statements of operations. Fourth quarter's gold sale revenues of $213 million had a year-on-year increase of $60 million or 48%. The significant increase was accounted for by a 15% increase in gold sold over fourth quarter 2009 in terms of assets, coupled with the average realized gold price being $1,373 in fourth quarter of 2010, a 24% increase from the same quarter in 2009. Another contributing factor was the production commencement of Vila Nova in the fourth quarter of 2010, which generated $8.3 million of revenues in the quarter. With the higher production in the Sino Gold acquisition, operating cost, DD&A and interest expenses all went up year-on-year. Kisladag's current operating permit has limits of 10 million tons of ore to be placed on the leach pad, which resulted in its fourth quarter production assets being lower and operating cash cost higher than the preceding quarters. Incidentally, Kisladag plans to increase throughput to 12 million tons in 2011 upon approval of an amended permit. Fourth quarter G&A costs also increased by about $12.5 million from 2009, primarily due to stock-based compensation being higher as a result of the Sino…

Thanks, Ed. Thanks, Norm. Operator, we'll open up for questions now, please.

[Operator Instructions] We do have a question from Rahul Paul from Canaccord Genuity.

Just quickly, could you refresh us of the applicable tax rate at the Chinese operations.

The tax rate in China is 25%.

And what about royalties at Jinfeng, White Mountain and Tanjianshan?

The total royalty for 2011?

Yes.

On a per-ounce basis is $18.

Now the reason I was asking is like, if I look at Jinfeng, for example, the difference between total cash cost and cash operating cost, it's about $100 an ounce. Is that all royalties, or is that something else that goes in there?

I believe it's all royalties.

It implies about 7% or so, so I was just wondering if there were maybe one-time items or something in there.

On a per-ounce basis, the royalty in Jinfeng is about $36, and White Mountain is about the same. So on a total company basis, it averaged out to be about $18.

What I was trying to get at is, what else other than royalties are included in the total cash cost for Jinfeng? I mean, you had $486 in cash operating cost and $585 in total cash cost. So if I take royalties of $30 an ounce, it's about $70 an ounce there?

The production tax is also included as well.

And how much is that?

Which amount to about $18 in the case of Jinfeng on a per-ounce basis.

Is that the same at -- I assume that will be the same at Tanjianshan as well?

Tanjianshan is higher. Tanjianshan is about $40, close to $50.

And that's in production tax?

Yes.

And just moving on to Vila Nova Iron Ore. I mean, I see that you made two shipments during the quarter, and the split was about 50-50 sinter fines and lumps. Is that represented of the mix that we should expect going forward?

Yes.

Yes, it is pretty much. I mean, it's 50-50 because you do a ship of -- you either do a ship of lump or a ship of sinter. And, yes, that is about the split going forward.

The next question is from Anita Soni with Credit Suisse. Anita Soni - Crédit Suisse AG: Just a question with regards to Kisladag, actually, a couple of them. Did you say the average recovery for sulfide with metallurgical tests was now 65 versus 60 in original?

That's correct. Anita Soni - Crédit Suisse AG: And the oxides are the same, right?

Yes, I mean, the oxides recovery is about the same. I mean, practically speaking, we're getting those recoveries with the course of crushing [ph] we originally planned for, Anita. Anita Soni - Crédit Suisse AG: And then just a question on Kisladag. I did ask Nancy, but it seems to me, going through a lot of your statements, I'm not quite sure if it is in fact a typo, but the fourth quarter cash operating cost is higher than the total cash cost. Was there an adjustment to some sort there?

I see what you're saying, Anita. You caught me sort of flat-footed here. Anita Soni - Crédit Suisse AG: No, I just wanted to confirm because it wasn't just in the one press release. It seems to be in all your MD&A and everything.

It looks like it's been transposed. Anita Soni - Crédit Suisse AG: But they were consistent about transposing it. That's why I was trying to double check. And then just in terms of the strip ratio at Kisladag, is that going to -- I mean, you've given us guidance obviously for the full year, but could you just kind of give us an idea, Norm, of how that's going to spread out through the course of the year? It's been trending up since 2010, so will we expect to see higher strip ratio for the first and second quarter as well?

Anita, we don't get into giving quarterly guidance. Anita Soni - Crédit Suisse AG: Quarterly guidance?

No, we just don't. Anita Soni - Crédit Suisse AG: You know I always try.

I know you do. You and Carrie do a very good job of that. Anita Soni - Crédit Suisse AG: And then lastly on the mid-March start-up at Kisladag. That was your tying in expansion of the circuits? Should you say that was...

Yes, that's getting us up to the run rate of 12.5 million or 12 million tons a year. That's correct.

The next question is from Mike Curran with RBC.

I saw you had a pretty high G&A in Q4. I assume that's not a good run rate. Is the $8 million to $10 million sort of range per quarter a better number going ahead?

The fourth quarter actual number is not a good run rate. For the total 2011 G&A budget, we're looking at about $64 million. The Q4 numbers included some non-recurring one-time charges.

The next question is from Josh Wolfson with Stifel, Nicolaus. Josh Wolfson - Stifel, Nicolaus & Co., Inc.: Just on Efemçukuru, I'm wondering if you can give us more context on how the underground development is going, in particular what depth the ramp is at and what sort of development rate you're running at?

Well, the underground is going very well. We're at three different heading -- there are three different declines now. The contractor has pulled up his performance quite a bit. And as I say, we've already gone through ore in the Middle Ore Shoot, and we're running parallel, drifting parallel to the ore in the South Ore Shoot. I don't have the daily advance rates in front of me but...

I mean, I was there a couple of weeks ago underground on all three declines. I mean, the conveyor decline now has reached the bottom where the ore bins are going to be located. The access to what will be the waste dump is in place and is at the level of the first ore drive. All three declines now have multiple headings. The ground conditions are very good, I would say generally, and the progress of the contractor I think is excellent to the extent that he's picked up his advance rate on each month since we've become engaged. Starting in April, when we start feeding ore through the mill, we're going to start be phasing out the contractor and bringing in our own crews to start taking on some of the development ourselves. Yes, I mean, I'm sure Norm can get back to you on all the minutia of how many meters a month, the meters a week we're doing on the different headings. We're happy to do that. Josh Wolfson - Stifel, Nicolaus & Co., Inc.: Their release seemed a little vague because we had received some update that you've been down to 500 meters last quarter, and this quarter just said there's an improvement, but it didn't say exactly what the specifics were.

Yes, I think we can provide sort of the total meters and meters per day advance. Josh Wolfson - Stifel, Nicolaus & Co., Inc.: And I know this is a difficult question, and I'm not sure if you can answer it. But it looks like it'll be a good 2011 if you can deliver some updates on the expansion potentials. Now you said over the next 12 months, you'll be updating the market. Now should we expect updates at all of Kisladag, Efemçukuru, White Mountain and Eastern Dragon? Or is this going to be just the first Kisladag update will be in the next 12 months?

No, our intention is sort of -- by this time next year to have laid out on all four areas where we see opportunities for expansion to lay out plans which will enable you fellows to build or put things in your model, understand what the thinking is, what the methodology is, what the capital requirements are, what the expectations are in terms of production operating costs and timelines. And the first deliverable on that will be what amounts are probably the largest element of the expansion opportunity, and that's Kisladag, and we'll be looking to do that at sort of following midyear. In July time, we'll be laying that out. Obviously, we haven't released our reserves and resources yet because we're just finishing off the exercise. But we've certainly seen a substantive increase in Kisladag, which just supports our belief that this mine can and should operate at a much higher production rates. That's the first one out the gate come midyear. Josh Wolfson - Stifel, Nicolaus & Co., Inc.: So would you say it'd be safe to say that the other expansions would be as evident when the reserve and resource update is released?

No, I wouldn't say so. I think in Efemçukuru, as an example, if you sort of go down the list, I think we're seeing opportunities within the existing plant as constructed to give us additional capacity. We're, certainly, I think, looking critically at the planned mining methods, and mining methods that will be implemented will probably see us shifting towards a method that has better control over dilution and thereby will increase their grade. So I think you'll see in Efemçukuru us commenting more probably towards the end of the third quarter once we have more operating experience underground with the mill. I mean, crudely put, the mill capacity that we're talking about is based on 50 tons an hour. There's certainly some indications that this mill, the mill circuit there is probably fully capable of operating at 65 to 70 tons an hour. So you don't have to be too swift to see how increase mill throughput, add perhaps 1 gram a ton on that head grade, you can realize this expansion fairly easily. But these expansion plans will come out as I described over the next 12 months. Josh Wolfson - Stifel, Nicolaus & Co., Inc.: And I guess on Kisladag then, I guess in comparison to Efemçukuru where you can ramp up the existing operation, you'd be looking at much more significant capital cost?

Yes, absolutely. I mean, the expansion that we're just completing that Norm spoken about where we're going up to about 12 million tons, that's essentially done, and that's really just been adding de-bottlenecking and adding some additional sort of secondary, tertiary and screening capacity. The type of expansion we're visiting now is an order of magnitude step-up, which will require, as you described, significant capital.

[Operator Instructions] The next question is from Joung Park with Morningstar.

So my first question was on Vila Nova. Were you guys able to ship out any additional iron ore shipments out of that mine during the quarter?

We just had the two shipments in Q4.

So none in Q1 so far?

We're shipping I think in the next couple of weeks, there'll be another shipment going out.

Two.

Two shipments, yes.

We've had two.

Sorry, we've had two already.

In Q1. And what kind of prices were you guys able to receive for those shipments?

About $120 to $130 a ton.

And a follow-up question on Vila Nova. You guys mentioned that it has the capacity to produce more iron ore than your guidance, but there's some transportation logistics bottlenecks, so I was just wondering if you guys were able to make any progress on negotiations with Anglo.

Work in progress, best way to describe it. Suffice to say, we're incentivized to look to try to enhance the performance of that operation through the year. We have a plant, as you acknowledged, that's capable of producing more. We have an ore body that's capable of producing more, and we're going to work with Anglo American to try to ensure that we're running at the best throughput possible. We're fully aware that we have approximately $100 margins on our present operating rate, and given our relatively high fixed cost element to the operation, the motivation is there obviously to get the divisor up.

And my final question was on Kisladag. You guys mentioned that the 12 million ton expansion will go online by mid-March. So I guess is it fair to say that you guys would expect the amended environmental permit to be received by then?

Yes, that's right.

The next question is from Kerry Smith with Haywood securities.

Paul or Norm, just on the tie-in of the tertiary pressures in February, is there much downtime to actually doing that, or is that fairly quick? So you're not really going to have an issue in terms of getting tons [ph] through the plant?

Yes, it's about a week or so, Kerry. It's not too onerous.

I think just from the last question, you're anticipating that permit for the 12 million ton per year rate by the end of March; right?

Yes.

And it is 12 million, not 12.5 million; right?

I keep saying 12.5 million. Yes, it's 12 million.

It's 12 million.

Yes.

And just on White Mountain, maybe Ed knows the answer to this.

It's 12.5 million.

It's 12.5 million.

People keep saying 12 million, and they shouldn't.

Well, I think it's because what's happened, Kerry, because we don't get to that run rate until part of the year, the budget shows 12 million tons for this year.

But with the permit in hand, you don't want to be constrained by your ability to get tons through the plant effectively.

The permit is for 12.5 million, but it's just that we don't kick it in until March. Therefore, we're going to only push 12 million tons through this year.

And then just at White Mountain in Q4, the cash costs were roughly $500 an ounce. It was $498, and I know that you had record throughput. The grades looked to be good. It sounds like the recoveries were better. I'm just curious why the costs were effectively actually higher than the last couple of quarters. Is there something else going on in there that your mining costs are going up? Or -- I just would've expected that the costs would've actually been lower given the throughput.

Yes, but...

No, you're right there, Kerry. It was mostly in the mining cost side, and that's just the function of putting a little more development in. We're trying to catch up so we can deal with the -- you've got voids in the ore body, you've got some water issues in some areas, and we've been trying to catch up to sort of give us more flexibility in the mine and plan to deal with that. And in Q4, I guess we just did a little bit better on catching up in terms of development.

Just more ore development, Kerry.

So should we kind of assume that, that carries on through 2011, that kind of rate then?

You should take the guidance we've given you, Kerry.

And just on the $54 million of exploration, how much of that, Ed, would be expensed this year, or will any of it be expensed?

$25 million is going to be expensed. The remainder $29 million to be capitalized.

And then just on Perama, just as the last question, just the feedback you're getting. As part of the view, is there anything there that's happening that's either positive or negative, or is it kind of as you'd expected? Can you comment?

I don't know if Greece is ever as you expected, Kerry. Look, to be perfectly blunt, it's a frustrating environment in which to make progress there. We are making progress, but it is -- I would characterize it, of all the jurisdictions we operate the most, probably the most frustrating. I mean, given the present conditions that exist in Greece, one would think it would be blindingly obvious why permitting projects that provide employment investment and tax base would move along fairly quickly. That's not what we're finding right now. Look, we are making progress, but certainly, as you probably detect that there is a note of frustration.

The next question is from Barry Cooper with CIBC.

I'm just wondering what were the profit margins that you saw at Vila Nova?

It's a bit early to say, Barry, to appreciate it. We really just got started in the fourth quarter.

Is it fair to say there was a profit in Q4?

Yes. But I guess if you're looking for implications on future based on what we did...

Yes, I realize that, that's meaningless. I'm just wondering if there was a positive cash generation there.

Absolutely. I mean, crudely speaking, as I mentioned, today's prices that we're realizing is almost $100 a ton cash margin on this.

On Kisladag, because of the inability to put more tons to the pad, is it fair for me to assume that the strip ratio that you had in the fourth quarter was brought about by perhaps some advanced stripping such that for 2011 it would be down because you had equipment but you couldn't put the tons to the pad?

Yes, that's correct.

That's kind of what I thought. And then when you hit the ore at Efemçukuru, what exactly did it look like?

It looked very nice.

It looked marvelous, Barry. We waited a long, long time to see that ore.

And in sampling, how did that more or less exactly what you thought with the grades?

Yes, pretty darn close. And ground conditions not bad, sort of as you expect in an epithermal vein of this type. Given a Y intercept too, where there's over 80 meters more in there.

On a comical lighthearted note, Barry, as you'll appreciate, we selected with great care where we would put the conveyor decline in what was meant to be waste between two shoots and lo and behold, what do we intercept but about 15 meters of ore.

That's always a Hollywood problem, is that?

Yes, exactly. So there are a lot of smiles in terms of Efemçukuru. We're obviously looking forward to getting it started here.

At Kisladag again, the basement schist where you found the mineralization, is that of a similar grade? And how do you see that kind of opening up with respect to the amount of basement -- obviously there's a whole bunch of basement schist there? Is it a structural zone that is relatively combined, or is this...

In terms of the grade, probably a little bit lower than average than sort of the 1 gram per ton, 0.9 gram per ton grade, but what this is, this is sort of a zone that we hit back, I guess, two years ago when we actually took some inferred resources off the books in that area because we thought it was cutting off the ore. So it's really mostly in the western part, and that's where we drilled it anyway, in the western part of the deposit. And into really -- it's a question we're going to have to answer this year with more drilling as to what the eventual significance of this is.

But it also has implications, Barry, I think, in terms of our views on exploration in the district for other Kisladag look-alikes. I mean, we had certain views on the schist before in terms of types of models for exploration, and that obviously changes our thinking a little bit elsewhere.

Yes, and is there much money then been allocated for that on a regional basis?

Yes, there is. We're still over the side track, and we're going to start looking peripheral side track in the southwest. We'll start looking more in sort of the west and northwest areas of the deposit. And as always, budgets are budgets, but what we end up spending is going to be dependent on results.

The next question is from Lihor Abraham from Scotia Capital.

First of all, on Eastern Dragon, you're saying the construction is going well through this winter. I'm just wondering if you are still expecting start-up for the end of this year?

Yes. That's the plan.

And then going back on the cost there, we talked about White Mountain, but I just wanted to ask also on Jinfeng. It seems overall the costs are creeping up, but especially at those two Chinese mine, and I'm wondering, why are you saying it is creeping up, and is it a trend that we're going to keep seeing?

As I said when I was going through the operations, at Jinfeng in the fourth quarter, it was really less ounces sold in the quarter, and we treated some lower-grade material towards the end of the year. I would -- in terms of where it's going, I would look at what we've given for guidance for 2011, which is in the $445 to $465 range, yes.

Quite a bit higher than your previous guidance. Is there any reason for that?

More underground material probably, yes.

And is it going to continue basically?

Which previous guidance are you referring to? We've only given one set of guidance for 2011.

Two years from now. I mean, I understand it's quite outdated. It was $370, $390 and $445, $465.

Sure.

The next question is from Jason Dana [ph] with BC Investment Management.

Maybe just on, the reserve and resource update coming up in March, is there going to be a significant change in the Eastern Dragon numbers with respect to the outcropping quartz vein set [ph] that you've talked about before? Or is that going to be coming through in 2011?

Yes, that will be coming in the future. I mean, at Eastern Dragon, as people are aware, we didn't drill this year. We did other exploration on the licenses, but we didn't drill anything. And really, the effective of -- it's a high-enough grade deposit that the effective change in the cut-off doesn't mean much, mostly goes as ore anyway.

And also on the expected increase in the reserves, is that going to be significantly going to change in the gold price? Or is it mostly through drill bit and sale extension drilling, that sort of thing?

It's going to be both. And I'm afraid we'll have to defer until we lay out the details to be able to lay out properly.

There are no further questions registered at this time. I would now like to turn the meeting back over to the presenters.

Let me spend one minute to go back to the question raised earlier as to why the total cash cost in Kisladag in the fourth quarter was lower than the cash operating cost. It has to do with the fact that in the fourth quarter, we reversed an accrual on tax, when we gained better clarity on the timing of the effective dates of the new tax loan. So that resulted in the reversal of overall accrual that we did. So that explains the reason why total cash costs were lower than the operating cost.

Alright. Thanks, Ed. Thanks, Norm. Thanks, everybody, for attending, and look forward to talking to you in the end of the first quarter. Have a very good day.

The conference has ended. Please disconnect your lines at this time, and we thank you for your participation.