Eldorado Gold Corporation (EGO) Q3 2016 Earnings Report, Transcript and Summary

Good day. My name is Steve, and I'll be your conference operator today. At this time, I'd like welcome everyone to Eldorado Gold Corporation's Third Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be question-and-answer session. [Operator Instructions]. Thank you. Paul Wright, President and CEO please go ahead.

Thank you, operator. And good morning and welcome to our third quarter 2016 financial and operating results call. I'm here today in Vancouver with Paul Skayman, our Chief Operating Officer; Fabiana Chubbs, Chief Financial 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 the forward-looking statement disclaimer at the end of our news release. We will try to make this another brief call, Paul and Fabi will review the operations and financial results and I want to touch on the overall outlook and where we currently stand in China and Greece specifically. We've updated our full year guidance, which still includes discontinued operations, which uses the actual 2016 closing date for the Jinfeng transaction of September the 6th and assumes the mid-November 2016 closing date for the transactions with the entire resources. Full year gold production is forecasted 495,000 ounces with average cash cost of $575 per ounce and all-in sustaining cost of $915 per ounce. In regards to Kişladağ, we do expect production at Kişladağ to return to Q4, 2015 levels where we presently forecast around 75,000 ounces for this quarter. Month-to-date daily production is running in excess of 750 ounces. Looking at sustaining capital for the year, it is now forecast at $80 million compared to the previous guidance of $95 million. In new development capital, we expect to spend approximately $230 million compared to the guided number of $250 million previously. On September 6th, we completed the transaction with China National Gold concerning the Jinfeng transaction and Fabi will review the financial reconciliations associated with this in a few minutes. The Yintai transaction relating to the sale of White Mountain, TJS and Eastern Dragon remains on schedule and our current guidance reflects of mid-November closing date. Once this transaction is completed the company will be left for stronger balance sheet, as we are looking at netting just over $800 million from these two sales add that to a current local liquidity and we were looking at having over $1 billion in total liquidity by year-end on the balance sheet. It leads me to the question of where we're going to spend these funds, to bring on our next phase of growth. We did present our plans for our assets with the emphasis on Olympias Phase II, Skouries development, Kişladağ expansion and Tocantinzinho project during our inaugural Investor and Analyst Day in September. Please do reference the extensive materials that we presented, which are on our website to review the capital development plans for the next three years. With that said, I'm happy to report the final development of Olympias Phase II is moving ahead rapidly now and we remain on track for production to commence in the first quarter of 2017. In exploration, our level of activity has increased through the quarter and we are now actively engaged in drilling programs in Brazil, Greece, Romania and Serbia. In Greece, development of the Mavres Petres [ph] Hanging Wall exploration crosscut continued through the quarter and the current rates to advance the first drill stations will be available in late Q4. We also recently commenced drilling at the Silka porphyry [ph] target in Halkidiki. Earlier this quarter, we announced the receipt of the exploration license for the Bolcana project in the Certej district in Romania. Drilling in the Bolcana area commenced this week. We are also drilling throughout the quarter at the nearby Sakarand deposit [ph] testing along-strike extensions of historically mined veins. In Brazil, Eldorado signed option agreements both with Votorantim metals covering over 3750 square kilometers of licenses and license applications in Minas Gerais and Pernambuco states. This agreement provides Eldorado with the opportunity to earn up to 70% of the licenses and delivery of a bankable feasibility study. Drilling commenced late in the quarter on these licenses at the Vulture showing in the Pernambuco state. Eldorado continue drilling at our new KMC skarn project in Serbia, where four drill rigs are currently active. Our first hole at the Shanac target intersected 298 meters, weighting 0.78 grams per ton gold and 0.14% copper within a magnetite bearing skarn. Drilling will continue through most of the Q4 KMC. Updated guidance for 2017, and year-end operating results will be provided in the second week of January. And just before I turn over to Paul and Fabi, I would like to take this opportunity to welcome George Albino to our Board of Directors. Many of you know George well and have worked with him over the years. His knowledge and experience will be valuable to our board and management team moving forward. With that, over to you Paul.

Thanks, Paul. Good morning, everyone. A tough quarter with Kişladağ and Tanjianshan performing - underperforming our expectations. To start in Turkey, Kişladağ produced just less than 50,000 ounces in Q3, longer lead cycles and material were in place on higher sections of the leach pad continued to contribute slower ounce production. We expected solution grades to increase earlier in Q3 and this was slower than anticipated. However, since late September ounce production off the pad has increased noticeably and we're now extracting around 750 to 800 ounces per day. We continue to maintain our guidance of 225,000 ounces for the year. During 2016, pad inventories increased by around 45,000 ounces and we expect to start drawing this down in Q4. We’re also currently installing two more absorption trains to increase our absorption capacity by around 65%. This will help reduce the amount of gold, sitting in solution in the pad and as pump [ph] back on to the pad as part of the intermediate leaching process. We expect commission these extra late trains [ph] in early November and they should provide ounces for sale before the end of the year. Tons of ore mines and ore placed on pad were well above budget at a higher grade them planned. The year-to-date strip ratios 0.83 to 1 and replaced around 800,000 tons of run a mine material on the leach pad in Q3 given the higher gold prices we're seeing compared to what we budget at the beginning of the year. Year-to-date, we placed approximately 2.4 million tons of run a mine at around half a gram. At Efemcukuru, the project again performed well during the quarter reporting better tonnages, but slightly lower grades than expected. This led to a budgeted quarter of ounce production with sales year-to-date slightly ahead of our budget. Cash cost have also been well contained in year-to-day they're tracking under guidance. In China for Q3 production total 43,100 ounces. Obviously, this only includes Jinfeng through to the sale date of the 6th of September. Prior to the sale Jinfeng produced just under 20,000 ounces for the quarter at lower cash cost in budget and over 2016 Jinfeng produced nearly 67,000 ounces and just having $700 per ounce across better than budget and at the low end of the guidance. Tanjianshan has another slow quarter with mine towns from Xijingou over the budget, but again at lower grade than anticipated. As explained in the previous call, the lower grade is a combination of narrower zones in the lower sections of the Xijingou pit causing high dilution and also lower grades than calculated on all stockpiles. Processing tons were down as was the gradable treated and as we indicated in the previous call, the mill at Tanjianshan suffered a crack in the shell and shutdown for repair. The repairs were completed in three weeks and this resulted in a 26% reduction in mill tons for the quarter. Cash operating cost were correspondingly high due to lower ounce production with similar spend. Right now, summer is [ph] on target per tons mined and traded is behind downgrade. This left us with higher cash cost and expected due to lower ounce production. On the development side, works continuing well on the construction of Olympias Phase II, steel erection and equipment installations is well advanced and I saw the mills, mills they've invested into place earlier this month. Most of the major equipments in place on side, parking and electrical installation are the next major tasks. Preparations also continue underground with rehabilitation of the existing workings and new development preceding at budgeted levels. We continue to expect to commission the plant in Q1 2017. At Skouries, we continue to work on earthworks, building erection and site clearing. This includes preparation works for the stockpile embankment and preparations for the - tile thickening area retaining well. At both Certej and TZ continuing to work on optimization studies as well as preparation for permit progress. And with that, I’ll turn it over to Fabi.

Thank you, Paul and good morning, everyone. I will go through the financial statements highlighting changes in significant accounts. We ended the quarter with cash, cash equivalents and term deposit balance of $412 million, including $43 million reported under assets held for sale compared to $292 million at the end of 2015. The increasing cash balance is mainly the result of $79 million generating by operations before changes in working capital, proceeds of $296 million received from the sale of Jinfeng. Net of $31 million of cash, held by Jinfeng at the time of the sale and $206 million usage of cash for capital programs. Net cash used by discontinued operation was $12 million. During the quarter, we follow our interest in Jinfeng for a proceed of $296 million net of taxes. Just to clarify, the composition of these amount reflects a selling price of $300 million, adjustment for cash and working capital of $25 million and income tax of $29 million. The balance of our Chinese assets are expected to be sold during the fourth quarter and the respective assets and liabilities are presented on the balance sheet as current assets held for sale and current liabilities held for sale. On the income statement, the result of the Chinese operation is shown in a single line, a discontinued operation, including a $3 million loss related to the sale of Jinfeng. Profit attributable to shareholders of the company was $21 million or $0.03 per share for the quarter, compared with a loss of $96 million or $0.13 per share in the third quarter of 2015. Excluding transaction cost and unrealized losses totaling $12 million, we reported adjusted net earnings of $34 million or $0.05 per share for the quarter compared to an adjusted net of $4 million or $0.01 per share in 2015. Gross profit from continuing operations for the quarter of $49 million, increased 63% year-over-year, as the impact of lower sales volumes was offset by higher gold prices and lower unit operating cost. Gross profit from discontinued operations for the quarter was $22 million. Those are my comments on the financial statements, I will turn the call back to Paul.

Thanks, Fabi, and thanks Paul. Operator, we will open up for questions now, please.

[Operator Instructions] Your first question comes from Andrew Quail with Goldman Sachs. Your line is now open.

Morning, Paul and team. Thanks for the update. Fabi, thank you for clarifying that adjusted earnings number. I have a question on just on the CapEx split for the Kişladağ expansion, just more so from question on, how much obviously will be in 2017 versus 2018?

Yeah, I guess it will - be reasonably evenly split a little bit less in 2017 a little bit more in 2018 so a sort of 40-60. And we’re doing a little bit of work in this year, but it’s fairly modest and not going to be a significant amount of cash so to spend this year I guess.

I think September was $60 million to $70 million.

That’s right.

So, that’s sort of a 30, 40 so 30 next year...

Yes.

And then Paul, obviously, you guys hopefully mid-November is going to be pre-cashed up or do you want to just touch base on potentially reinstated [ph] next year. And just any comments around that, I know it’s a board decision but just if you - a lot of other guys just wanted to get a comment.

Yeah, no, I think we previously stated with the gold price backup about 12:50. This is back on the table again and we will be looking to make that decision with the board, when we conclude our year-end financials.

Okay, that’s all for me. Thanks.

[Operator Instructions] And the next question comes from Steve Butler with GMP Securities. Your line is now open.

Good morning Paul. Guys, you talked about the absorption rate on to the carbon at Kişladağ, Paul. And has this ever been experienced before where you've had this issue, or is it just because you’ve been stalking some decent grades here at Kişladağ in the first half, because it’s obviously been a long-lived asset and why the extra carbon coms required now?

It’s not an issue with absorption per se, it’s really material. The reason for the lower production in Q3 is solutions is taking a long time to sort of come through and out of the pad, so that’s the first comment. I guess we’ve now got higher pads than we've had previously, so the lag is more significant. The extra carbon columns, effectively we’ve got so much solutions sort of running around the circa that some of the material is going back on to the pad with some golds in it and we’re looking to put that material to our carbon column that we’re extracting that gold, so effectively putting all barren solution back onto the leach pad.

I mean Steve, just a couple of additional comments I mean I think it is a sponge, just making it larger and larger and larger in the quantity of solution that we have now inside of the pad that’s bearing gold has grown sort of year-by-year to the point that we’re actually we’re holding up our return on money by not having the ability to run this material, this lower grade material through the carbon columns.

Okay. That makes sense.

That was a lot smaller. We were able to get the higher-grade solution and we didn’t have such a big circulating load as we have right now.

Okay. And on the exploration site guys in Brazil maybe it’s all fairly early stage projects with 10 metals, but can you comment how early stage this first target is for drilling and obviously, it’s a big license, but how is it looking on target selection here?

No, these are, I mean part of the traction to doing the deal on we did is that we had already targeted so we are on targets we are drilling, we would expect to have an initial result before year end.

And what is the Vulture target representing itself as?

It’s sort of these are brasher zones that we’re initially drilling.

Okay. Thanks, guys.

All right. Thanks, Steve.

Your next question comes from Cosmos Chiu with CIBC. Your line is now open.

Hi. Thanks, Paul and team for hosting the call. Maybe a quick question for Fabi, just looking at the financial statements here, the cash flow operating, there was big adjustment in the non-cash working capital changes or the working capital changes for purposes of your cash flow operating, for me it seems like there was a big adjustment for the payables, but I can’t seem to figure how to link it to your balance sheet, because I think on your balance sheet, it didn’t really seem like your payables went up by that much. My concern is that, is it going to get reversed in the future quarter maybe Fabi, if you can just walk me through that?

I may have to, one other thing you will have to bear in mind here is that you do have the working capital, you have to consider the change of discontinued operations because in - more detail I could send you an email on it and because it will be quite accounting heavy.

Okay got it and then just in Indiana, as I said Fabi, my concern is that it’s going to turn out to be a negative adjustment in the future quarter with the negative impact to your cash flow operating is that going to happen?

Probably no, because it’s discontinued operation, but I would send you the information on an email.

Okay, great. That’s all I have. Thank you.

[Operator Instructions] There are no further questions at this time. I now turn the call back over to the presenters.

Thanks, operator and thank you everybody for attending this call and wish you all a good weekend. Thank you.