Eldorado Gold Corporation (EGO) Q4 2015 Earnings Report, Transcript and Summary

Good morning. My name is Mike and I will be your conference operator today. At this time, I would like to welcome everyone to the Eldorado Gold Corporation Yearend and Fourth Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remark there will be question-and-answer session [Operator Instructions]. I will now turn the call over to Paul Wright, President and CEO. You may begin your conference.

Thank you, operator. And good morning and thank you all for joining us and welcome to our 2015 fourth quarter and yearend financial and operating results call. In Vancouver this morning, we have myself, Fabiana Chubbs, the Chief Financial Officer; and Paul Skayman, Chief Operating Officer; and Krista Muhr, our Vice President of Investor Relations. As always, we have provided detailed financial and operational information in the press release from yesterday evening. Before I begin, I need to remind you that any projections and objectives included in our discussion today are likely to involve risks which are detailed in our 2015 AIF and in the forward-looking statement disclaimer at the end of the news release. We will follow the usual format with myself providing some general comments on the Company's business and our results. Paul will then provide some operational detail followed by a brief walkthrough of financial statements led by Fabi and then we'll open up for questions. Getting right into the full year highlights, I'd like to congratulate our teams who had the best safety year on record with global loss time instance rate of having been decreased by 25% in the year. Our teams in China achieved zero loss time injuries in 2015. That said while we had no fatal accidents in 2015. I am deeply saddened to report the tragic death of Constantinas Jonas, an experienced underground miner at our Stratoni mine in Greece just last month. The inspection immediately following the incident from no substandard operating conditions however we're working very hard to ensure the similar incidence do not happen again. Moving onto the operations themselves, I am very pleased to report strong operational results as all of the mines have again delivered to or exceeded full year guidance that had been set in 2015. Gold production totaled 723,532 ounces, average cash operating costs were $552 per ounce and all-in sustaining costs averaged $842 per ounce. Looking back at the original guidance for 2015, we had expected product to come in between 640,000 to 700,000 ounce at cash cost between 570 and 615 an ounce. The 10% favorable increase in production was primarily due to leach pad inventory draw down at Kisladag. Cash costs were lower than budgeted due to continued cost savings efforts at all our sites combined with weaker operating currencies and lower energy prices. Additional targets that our team accomplished for the year included the receipt of Eastern Dragon project permit approval from NDRC in China, the completion of positive feasibilities for both Certej and Tocantinzinho, and in Greece five rulings in our favor by the Council of State, all upholding the validity of our permits and investments in the Halkidiki development projects and mines. We ended 2015 with proven and probable gold reserves of 624 million tonnes at 1.24 grams per tonne gold and slightly in excess of grade of the previous year and contained 24.9 million ounces. The 4.1% decrease in gold reserves was mainly driven by depletion from mining during the year. The complete mineral reserve and resource data set can be found the end of the news release and includes all the data for tonnes, grades and ounces. In regards to the U.S. 1.5 billion impairment noted in the release, the largest component is attributable to Skouries at approximately 700 million. This change relates to the delays in construction associated with permitting challenges and cost resulting, in addition a preliminary study completed by AMC supports anticipated higher capital and operating cost for the plus 20 year underground mine which follows a 7 to 8 year initial open pit phase of the operation. Two days to go we receive our installation permit for the Olympias project allowing us to proceed with a mill refurbishment required for phase 2. In January as a result of the Council of State positive decision in our favor we also receive the building approval for Skouries. We are now waiting the approval of the revised technical study for Skouries which we expect in the near term. We believe that the ministry has taken positive first steps in granting the building permit for Skouries and approving the installation permit for Olympias. With that said not only what we require additional permits over the duration of these operations, but we will also need a cooperative and willing government who chooses to work with us and all of our stakeholders over the long lives of these significant assets. I believe at this point in time we’re making constructive progress in that regard. And just to provide additional clarity as it relates to the Olympias project, our decision to move forward with the completion of Phase 2 is predicated on the timely granting of the approval of the technical study for Skouries which again we anticipate in the near-term. Moving on to China, in 2014, we announced that we were evaluating the merits of the potential listing of our assets on the Hong Kong Exchange. Since then we’ve had numerous approaches by Chinese mining companies looking to acquire these high quality assets. I am of the opinion that we will have a resolution to this value up maximization exercised within the near term and you should expect updates during the second quarter. Despite ongoing capital spend on growth projects, our balance sheet remain very strong with total liquidity of nearly 670 million including 290 million in cash and cash equivalents and 375 million in undrawn lines of credit. Looking at the year ahead, our mines are on track to produce between 565,000 and 630,000 ounces of gold at an average cash cost to ranging between $585 and $620 per ounce, and all in sustaining cost between $940 and $980 per ounce. We will continue to advance our development projects in Brazil and Romania while remaining financially prudent in today’s challenging metal price environment. With this I will let Paul and Fabi dive into the operations and the financials in more detail. Over to you Paul.

Thanks Paul. Good morning everyone. Today I’d like to comment briefly on the operations for Q4 2015 as well as provide some color around where we’re at year-to-date in 2016. Generally as Paul indicated all the operations performed well over the year, the previous year with the solid performance both in terms of ounces produced, cash operating cost and all in sustaining cost. To start in Turkey, both Kişladağ and Efemçukuru performed well beating budget on both gold production and operating. Kişladağ exceeded expectations with a solid 280,000 ounce production for the year to well ahead of our earlier predictions. This was done by increasing solution addition and by drawing down the inventory in the leach pad. So far this year both of the mines are meeting targets year-to-date in terms of ounce production. In China, Tanjianshan had a slow fourth quarter with low grade material being treated resulted in lower ounce production and higher cost. Over the year though there were essentially on target for ounces and slightly under on cost. Jinfeng had a good final quarter rounded off the year with a beat on ounces and cash costs and White Mountain also did all of their targets. So far this quarter Chinese assets have started slowly mainly due to grade but we don’t anticipate any problems with the targets for the year. On the development side as you’re all aware we received the installation permit for the Olympias Phase 2 a couple of days ago. We stopped processing Phase 1 material at the end of February and have traded approximately 90,000 tonnes in the first two months. Work continues at the side on concrete demolition and structural mechanical disassembly purchase orders for Phase 2 equipment are also well advanced. At Skouries in Q4 we continue working on earth works and tree cutting in preparation for commencing work on the tails dam. The process plants also progressed well in the quarter with commencement of internal steel work placement. We placed Skouries into care and maintenance early in January and we’ve continued to take delivery of purchase items and preparing the site for care and maintenance. As Paul indicated we continue to wait for sign off on a revised technical study for Skouries and that sign off is expected shortly. At both Certej and Tocantinzinho we continue with optimization studies during the last quarter of last year and at Eastern Dragon we’ve continued to work with the governments on the mining license application. We recently received formal notice that the application have been accepted and we’ll continue to update as things progress. On the exploration side, fairly busy quarter. For the year we spend approximately $30 million completed just over 58,000 meters of drilling. At our mine sites, we completed drill programs at Efemçukuru targeting the Kokarpinar vein; Tanjianshan with further drilling on the Tanjianshan North deposit, and at White Mountain targeting extensions on the north and far north veins and also some drilling at Stratoni in Greece. We also completed brownfields drill programs at Jinfeng and at several targets adjacent to Certej. Finally, we completed work on early stage and project generation activities in Turkey, Brazil and Southeastern Europe. And with that I’ll turn it over to Fabi.

Thank you, Paul and good morning everyone. Our results of the financial statements highlighting attritions [ph] and significant accounts. We ended the year with cash, cash equivalents and term deposit balance of 289 million compared to 498 million at the end of 2014. The decreasing cash balance is mainly the result of cash generation from operations before change in the working capital of 193 million net of uses of cash for capital program of 396 million, debt repayment of 60 million and dividend payments of 11 million. During 2015 we recorded non-cash impairment charges totaling 1 billion. In property, plant and equipment net of deferred income tax recovery and 476 million in goodwill. The impairment of property plant and equipment included 740 million related to Skouries and 214 million related to Certej, which was recorded in Q3 2015. Onto the income statement, net loss attributable to shareholders of the Company was 1.5 billion or $2.15 per share compared to a net profit of 103 million or $0.14 per share in 2014. The loss in 2015 was mainly due to the impairment charges referred above, a deferred income tax charge of 63.5 million related to change in income tax rate in Greece and lower growth profit from gold mining operations. Revenue for the year of 863 million and gross profit of 230 million and lower from a year ago due to lower realized gold prices and lower gold sales volumes at Kisladag and our Chinese mines. These are my comments on the financial statements. I will turn the call back to Paul.

Thanks, Fabi. Thanks Paul. Operator, we'll open up for questions now please.

[Operator Instructions] Your first question is from John Bridges from JPMorgan.

I was just wondering, given the cash you're sitting on, your liquidity, are you having interesting people coming in the door sort of with ideas as to alternatives while you wait for all permits for Skouries?

Well, John, I mean it could be flipping and say the mining society is fully of interesting people, so yes people do appear on our doorstep and occasionally have interesting ideas, not a lot. We are clearly in the mode of being open for interesting ideas going forward in the event that we did, I’d like to divest ourselves with the Chinese assets, we would be looking at some point and how we replace that production both internally and externally. So I'll suggest we're probably little bit more alive to be external opportunities now than we were, say, a year or two ago. But there isn’t a lot, John, I mean, there is a not a lot of gem just waiting on the curb to be picked up.

Yes, understood and then that light, I was intrigued by your early staged expression around Kisladag, is that sort of a due diligence exercise or is that got real potential, how excited are you of that study?

Turned away [ph] you saw that, we're not doing a lot of early stage exploration. Well I --.

Well, looking to -- you're looking for Portage [ph] and things around that?

Yes, I mean that's very early stage. I mean it's -- we've been obviously looking for a while on second Kisladag because these reports we sent tend not be one-off but it's been a bit of struggle to just obviously have any success. So there is nothing I could point to this point John.

The next question is from Phil Russo from Raymond James.

On your Greece positioning here, I thought I had you said in your comments there that approval for the tech study there is what you're looking for now at Greece, is that correct and then I thought I also heard you say that you're expecting that shortly, I just curious what you're seeing to make you think that would be coming sort of eminently?

Well, I mean there is a statutory limit on the time that the government has to review and approve these submissions and that's really driving our expectations that a decision will be due shortly. I would say that we've seen more encouraging engagement between ourselves and the ministry over the last month or two which is I think contributed towards the timely granting of the building permit of the council state decision and more recently the Olympias installation permit and our intention to proceed with Olympias reflects as I say the granting of the installation permit, but also our expectation that this sort of more positive engagement will result in the timely approval of the technical study for Skouries and those two combined would allow us to reactivate or not reactivate, but reactivate certainly the Skouries project and proceed with the completion of phase 2 Olympias.

Okay so Olympias, you're a week away there from pausing it almost but you'll keep it going as this is a sign of good faith here I guess that you can get this tech report from Skouries and move forward with that?

I mean just to be clear, I mean the messaging that we sent externally in January, it remains consistent and that is that we needed to see an ability to move forward with both Skouries and Olympias and that would come through not only the granting of the permits but a more constructive relationship with the government and I think what I am singling here now is that we're in our opinion seeing a more constructive relationship emerging manifested in the recent approvals and our expectation is that will continue with the Skouries technical study approval.

Okay great and then maybe just one just on the timing and purchase you’re having I am just wondering just so what the prices that you’re seeing from the Chinese I am trying to get sense of how far apart the gold prices are here, are the pricing in line near your expectations because I asked the question in terms of what is the likelihood you can get a deal done with the Chinese here, are they offering reasonable valuations?

Any potential sale of these assets is reflective of our intentions to do better for ourselves and what the alternatives are which we continue to operate in China and we’re actually acutely aware of the way we value these assets inside the company and we’re also aware of the way the market values these assets. And that’s probably what is very specific as I can be in terms of what we may or may not do as it relates to divestment and pricing attached to that. We’re not considering a divestment option to disappoint ourselves in the marketplace I guess that’s the best way I’d describe it.

The next question is from Cosmos Chiu from CIBC.

A few questions or maybe first off maybe a question for Fabi. After the $1.5 billion non-cash write down. Could you give me your carrying value or book value for your Greek assets such as Olympias, Skouries and maybe Certej as well?

The Olympias is still about $1 billion, I believe its $1.3 billion. And Skouries is in the $300 million, livid [ph] over 3 and Certej is always been there $350 million range 100 million I don’t remember the exact number, but that’s the range.

And then earlier this year you have talked about -- you have given the CapEx budget for 2016 I am just wondering how much of that has been spent so far specifically Olympias you have budgeted $155 million for the year. How much of that has been spent so far year-to-date, Skouries $15 million how much of that has been spent, Certej $20 million?

Very little, and I don’t have the exact numbers, I guess from our side we’re a little behind where we thought we would be after a couple of months. But the bulk of the spend is reflective of the Olympias construction I mean the Phase that we’ve been engaged in and still are is more frankly destruction and that is creating -- dismantling and creating areas for the new equipment to go into Cosmos, but I mean we’ll report that at the end of the first quarter, we’ll give you the year-to-date spend.

I guess you know that as you had mentioned in the press release earlier this year as well as you said Olympias spending is predicated on getting the permits and what not. And on that in terms of the permit stand following up on some of the questions I have been asked. Could you remind me again in terms of do you now have all the key permits that you need at Olympias with the installation permit being granted two days ago? And beyond the signing off of the technical report at Skouries what else should we be looking for in terms of permitting? In terms of key permits, of course I know there is a lot of routine permit.

Again the problem is most of this stuff is routine and it's become elevated because of problems actually receiving them. I mean we would go through a similar process at both, installation permit allows us to complete the construction, there are as you say few other sort of more routine permits. But Olympias we’re effectively now able to move ahead and complete the construction, the Skouries technical study allows us to continue with certain parts of the project that have changed from the original technical study and that would need installation permit. But again it should be a fairly routine process, we see that the technical study as the calculus hopefully.

I mean the bigger picture on this Cosmos as it relates to the permitting environment in Greece is that as you seen over the last year we’ve struggled to obtain permits and the way we’ve returned, we retained or received permits as being through the courts. What’s significant about the, obviously, the installation permit for Olympias and we expect the approval of the technical study on Skouries. These approvals are being granted by the ministry and as opposed to us having to wrest them free through legal action. And this is really what my messaging was all about in January, is we have to get to a normalized working relationship and the encouragement that we’re seeing based on the dialog and based on obviously this most recent grant is indicative of the fact that we are, I believe moving to a better place here. Yes as Paul described, I mean, in the case of Olympias the installation permit gives us the ability to basically completion construction. In the case of Skouries, the technical study is important because of what I've just described, are there other miner licenses and permits are required before we can flick the switch on the Skouries plan, of course there are. But I think the importance of the technical study is it sets the ground for I think a more constructive and logical approach to the granting of routine permits going forward and that's was important to us.

Yes, of course there is as you said Paul you need to look at the bigger picture as well, right. And then maybe one last question for me in terms of a dividend, certainly the suspension of dividend must, I think was pretty difficult decision, but given your balance sheet and to me it's pretty solid in terms of your cash position and there is no short-term debt, I would have thought you would be able to maintain that dividend, what sort of the thinking behind that?

We are going to -- at the present time the decision was made with lower gold prices. We're looking at the beginning of the year with the lower level of 100. We're going to look at these again and revisit it later in the year.

Yes, I mean because we're not paying a dividend at this time the six month don't assume that there will not be dividend before the end of the year. I think that the best I can give. We -- rest assumed the decision not to pay a dividend at this point in time was not lightly taken and there is a significant discussion ongoing as to when and how we can resume dividend payment.

The next question is from Anita Soni from Credit Suisse.

My first question just regards to Tanjianshan, I am just looking at the reserve statement and your inferred category even when it's about 3.9 gram per tonne material and even if you add in dilution it seems like it's comfortable to your reserve grade, what would it take to convert that inferred at this point?

I think that material that you're referring to is Tanjianshan material and it is really more drilling I guess to convert that across its underground material at Tanjianshan I suspect.

So I would then require I guess higher grade than what you’re hoping to get your comfortable reserves and open pit then?

Yes and some drifting and driving to sort of get access into there as well, but I mean in terms of sort of geology, et cetera, it's reasonably well understood. We just need to more work on converting that. I think there is a reasonable expectation of conversion on that material.

And then just with regards to Kisladag, the expansion plans. Are there any changes to the outlook that you put out about a year ago, at this point or it's just basically exactly same at this point?

Trying to think what we put out a year ago, which one are you referring to?

I was around 250 for the next couple of years and then 2018 headed up ticking a little bit and then 2019 had sort of the 360?

If you look at our corporate presentation we have updated our ounce production through 2019 and that's reflective of not -- no expansion it's just simply reflect and the gold production goes up to around 300,000 ounces as to reflective of a projected increasing grade between now and 2019 where we end up at around a gram per tonne. So I don’t have a copy of the corporate presentation right in front of me, but if you go online you'll see that in the Kisladag section, there's a bar at the bottom that shows the ounces per year through the period. Any decision to complete the Kisladag expansion obviously would impact on that.

Your next question is from Sid Subramanian [ph] from Fairtest Investment Research.

Just got a question about this Skouries project, you are waiting on the technical study or the approval, but I think you recall there was also a technical report for Olympias, is that going to be -- is that what you're referring to when you're saying the Skouries one or are there two separate reports?

There are two separate applications that were in the ministry. One was for the installation permit for Olympias which is being granted. The second is for technical study which his sort of really an updated technical study in Skouries and that outstanding we'd expect to receive that shortly.

So the one, the technical report the study for Olympias is a still approved and there is no issues with that?

Yes, that's right.

But then I guess a follow-up was, was the issue with Skouries around flash melting, wasn't it? But I thought there was also a parallel issue with the flash melting for Phase 3?

You're getting I don’t hear a little bit, there have been various legal challenges to the process to the permit all of which have been ruled in our favor and there were challenges related to the use of flash melting as part of the manner in which the process was designed and permitted all of those who’ve gone through the courts to the basically the council state where decisions were rendered in favor of the permits and the process. So this is -- the application we have in the ministry has got nothing to do with flash melting it's simply that as in normal project as you work your way through the project and you complete detailed design, you have minor changes to locations, orientations of building that necessitate us as to resubmit the technical study to gain approval of these minor changes, and as I said orientations some places, location in others of specific buildings. It's got nothing to do with the process per se.

Perfect. Okay, great.

And that’s where we’re waiting on.

Okay, perfect and that’s it from me. Thank you.

Your next question is from Stephen Shipman from Financial West Group.

I am following up on Cosmos discussion of the dividend cut to shareholders. I don’t have the 20F in front of me, but could you describe what the option grant package was this year and how you decided to make whatever level of grants you made on the option packages?

Well, no, I can’t to be frank, I don’t have it in front of me either.

But someone must know about the option grants that were made because it's been discussions, not? And again the purpose I’m trying to get an understanding of the balance between cutting the dividend, the shareholder interest and what’s going on with management interest and incentives?

Well, the decision not to pay a dividend at this point is not related to option grants.

I understand it's not related, but it's certainly relates to the interest of the shareholders.

I am sorry, but [multiple speakers].

I understand one is cash and the other one isn’t cash, but it's also dilutive?

Look, I and nobody here sitting around the table has the option grants in front of us at this point in time. The option grants were provided in the formulae manner that they has been in previous year, and we’ll look here in the disclosure.

Okay, so nothing different has occurred this year than in prior year?

No.

Your next question is from Tanya Jakusconek from Scotiabank.

Can I come back to Skouries, Paul I just wanted to talk a little bit about the write down that occurred it was significantly larger than we had expected and we did see that you mentioned that the capital and the operating cost at the operation has changed and was part of the reason for the write down. Can you talk a little bit about what has changed there from what originally was filed in your technical report?

Look, we’ve got a fairly dated study that supported the reserves Tanya which we needed to bring current so that we could restate our reserves. And what we did is we engaged AMC to essentially take a look at the project from beginning to end. So we developed a first pass I guess of what 4.5 million tonne a year underground mine would look like and loaded it with everything including the kitchen sink. And that’s what we came up with this little project that clearly has higher capital requirements for the underground and higher operating cost over the 20 plus year mine life. Now is that necessarily the optimal design and plan for the mine, no not necessarily. I mean the write down itself was not simply limited to higher capital or projected higher capital and higher operating cost in the underground phase it was reflective also of the significant delays that we’ve had in implementing Skouries Phase 1 and bringing the open pit into production. And frankly not only the time frame associated with that but also the additional costs that have been incurred.

And so looking at the underground Paul what was originally contemplated at that time, when you went back and loaded the capital in the underground was there more development or has anything changed in the mine plan in the underground?

I think what we have is a much more comprehensive complete mine plan than what existed in the study that we inherited and was formed the basis of the value that was recorded through these assets at the time of the transaction.

Okay, so maybe things weren’t included in that that you’ve actually been now included?

Exactly.

And then, Paul, if I could turn over to Greece, you mentioned that we did get the permit for Olympias which is great and the relationships have taken a more positive turn. Has the Greek government reached out and actually acknowledge that they want this to continue that’s what made you more positive, is it just because we got the permit or have we actually engage --?

No, the permit comes when you apply a permit, ideally you have -- actually have people talking to each other and that I can say is happening, right. And that is without being specific there is actual engagement and through the engagement, the process is worked and we've been -- we have as demonstrated been granted permit or permit as it relates to Olympias and our expectation is that will continue with the Skouries project as well.

And that wasn't the case that Paul in January, so they actually have started engagement talking with you?

That’s correct.

[Operator Instructions] And we have a question from the line of Ian Bickis from Canadian Press. Ian Bickis, your line is open.

It sounds like we're done.

And there are no additional questions at this time. This concludes today's conference call. You may now disconnect.