Kinross Gold Corporation (KGC) Q1 2015 Earnings Report, Transcript and Summary

Thank you for standing by. This is the Chorus Call conference operator. Welcome to the Kinross Gold Corporation First Quarter 2015 Financial Results Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] At this time, I’d like to turn the conference over to Mr. Tom Elliott, Vice President, Investor Relations. Please go ahead Mr. Elliott.

Thank you, and good morning. With us today, we have Paul Rollinson, Chief Executive Officer; Tony Giardini, Chief Financial Officer; and Warwick Morley-Jepson, Chief Operating Officer. Before we begin, I’d like to bring to your attention the fact that we will be making forward-looking statements during this presentation. For a complete discussion of the risks, uncertainties, and assumptions, which may lead to actual financial results and performance being different from estimates contained in our forward-looking information, please refer to Page 2 of this presentation, our news release dated May 5, 2015, the MD&A for the period ended March 31, 2015, and our most recently filed AIF, all of which are available on our Web site. I’ll now turn the call over to Paul.

Thanks, Tom. Thank you all for joining us today. As you can see from our results, we’ve continued our strong performance in 2014 and a solid start to 2015. In Q1, Kinross produced approximately 630,000 ounces, putting us firmly in the middle of the guidance range for 2015. On the cost side, we’re actually tracking below guidance. Cost of sales for the quarter was $709 per gold equivalent ounce, which is down from last quarter, as well as compared to full-year 2014. All-in sustaining cost of $964 per gold equivalent ounce for Q1 is also lower quarter-over-quarter when compared to full-year of 2014. The lower cost in large part can be attributed to the benefits of lower power and fuel costs as well as to favorable foreign currency exchange rates. While these factors have benefited the Company as a whole, they’ve had particularly positive impact at Kupol where cost of sales of $476 per gold equivalent ounce was the lowest since Q4 2012. And at Paracatu where cost of sales declined for the third consecutive quarter to $752 per gold equivalent ounce. Meeting guidance as many of you know is a commitment we take very seriously here at Kinross. And while we’re still early in the year, I’m very proud of the fact that we’ve hit our targets for the 11th consecutive quarter. I’d now like to provide you with an update on the status of Maricunga, and then turn to some new organic production opportunities that are underway. Warwick will provide greater detail on these areas, but to start as noted in the press release yesterday, we expect mining and crushing operations at Maricunga to restart in June using an additional backup power plant, which is currently being assembled. While the mine facilities did not sustain any damage, heavy rains in the resulting mudslides in Chile’s Atacama region in late March, severely damaged roads and power lines. As a result, it has taken time to establish alternate routes to the mine, which is located at an altitude of 4,600 meters. I'd like to point out that our team has done an incredible job working around the clock to normalize operations. The temporary suspension of mining and crushing, however, will inevitably impact production and costs at Maricunga. But the good news is we do not anticipate an impact to regional guidance for the year. As you can appreciate, we operate nine mines in different jurisdictions in geographies. And due to the variable nature of the business, it's our job to manage the puts and takes specific to each site in order to meet our overall targets. In the case of Maricunga, any reduction in ounces is expect to be largely offset by Paracatu, where new developments have led to an upward revision in our production forecast there. I’d like to now turn to two new organic production opportunities that we are currently developing. The first initiative is expected to begin reprocessing tailings from Paracatu’s Santo Antonio tailings facility starting in the fourth quarter of this year. The project is expected to increase annual production by approximately 34,000 ounces at a production cost of sales of $400 per ounce over a minimum of nine years. With a capital cost of approximately $20 million, which is expect to be paid back in the second year, the Paracatu tailings reprocessing initiative is a great example of how our focus on continuous improvement allows us to add value and optimize our operations. This brings me to the second organic initiative, which I’d like to highlight. At Chirano, we are moving forward with plans to extend mine life by one year to 2020, by adding ounces from two deposits: Paboase, which is already in production and ramping up and Akoti, which will become the third underground mine at the site. Chirano is one of our lowest cost assets and is also located in a highly prospective area where as of year-end we had added approximately 240,000 ounces of measured and indicated resources. The extension gives us another year of low-cost mining, while at the same time provides us with more time to explore for additional resources. These initiatives at Chirano and Paracatu are in addition to our plans to complete the La Coipa Phase 7 prefeasibility study later in the year. And it's important to remember that we have 9 million ounces of proven and probable reserves at Tasiast, which has the potential to be a significant contributor in the future. So to conclude, we have several new initiatives underway to organically add ounces. And while we will be focused on getting Maricunga back on track, I have no doubt the team will rise to the occasion as they did turning the operation -- turning around the operation at 2014. In the meantime, I’d like to reiterate that we remain firmly on track to meet our guidance this year. Thanks to solid operational performance at all of our mines. Warwick will be walking you through Kinross’s operational results for the quarter in a few moments. But first, I’ll turn the call over to Tony, for a review of our financial results.

Thank you, Paul. During the first quarter, our balance sheet continued to strengthen. While the average realized gold price declined year-over-year, our financial results benefited from our continued focus on disciplined capital spending and lower costs. We added approximately $27 million of cash to the balance sheet and repaid $30 million of debt associated with the Kupol loan. This has increased our cash position to more than $1 billion while also reducing our net debt position to under $1 billion. As a result, our net debt to EBITDA ratio at March 31 of 1.16 decreased for the second consecutive quarter. Turning now to our financial results. Production costs of sales were lower year-over-year and quarter-over-quarter as a result of lower fuel prices and favorable foreign exchange rates. Our biggest sensitivities are the rouble, which averaged 63 versus the U.S dollar and oil which was $49 a barrel during the first quarter compared to our budget assumptions of 40 roubles and $90 oil. Taken together, foreign exchange and lower oil prices resulted in an estimated benefit of approximately $40 per ounce to our cost of sales. We maintained our focus on capital discipline, reducing capital expenditures by 11% compared with the same quarter last year. We are on track to meet our full-year guidance of $725 million. While we continue to deliver on our operational targets, our financial results were impacted by lower oil prices. Our average realized gold price during Q1 was $1,218 per ounce versus $1,299 per ounce during the same quarter last year. Adjusted operating cash flow for the quarter was $215 million or $0.19 per share compared with $242 million or $0.21 per share in Q1 last year. First quarter adjusted net earnings were $15 million compared to adjusted net earnings of $34 million in the same quarter last year. Overall, we added to our strong financial position in the first quarter. Our focus on maintaining the strength of our balance sheet and our financial flexibility will continue to be priorities as we move forward. I’ll now turn the call over to Warwick.

Thank you, Tony. With good production and strong cost performance during the first quarter, we are off to a solid start to the year. I'll be providing an update for each of our regions as well as providing more details on the new organic opportunity at Paracatu, that Paul mentioned earlier. Our Americas region performed well in the first quarter, producing 329,000 gold equivalent ounces at a cost of sales of $814 per ounce. First quarter production at Round Mountain was slightly lower year-on-year as more operations were suspended following a fire in October of last year. While [indiscernible] down production from the heap leach which accounts for approximately 75% of production continued. More repairs were completed in March and the facility is now operating at full capacity. As Paul mentioned, heavy rains in northern Chile near the end of the quarter damaged the main access roads and power lines to the Maricunga mine. As a result, we temporarily suspended mining and crushing and reduced operations at the ADR plant to 80% of its capacity. We now have established alternative routes to the mine and have restarted employee rotations. Repairs to primary roads are continuing. We expect to restart mining and crushing operations in June with the use of additional backup power plant. The main power lines are expected to be restored by September of this year. As a result, we expect it to be an impact to Maricunga’s production and costs for the year, particularly, in the third quarter. However, as Paul highlighted a few moments ago, we expect this to be largely offset by positive developments at our Paracatu mine in Brazil. You'll recall that we began processing a blend of two ore types to both plants at Paracatu in the later half of 2014, an innovation which helped the mine to deliver record production last year. We continue to see these benefits in the first quarter with strong production of 125,000 ounces and the cost of sales decline for the third consecutive year. Foreign exchange rates and lower power process have also benefited Paracatu’s costs in quarter one. The strong focus on CIS continued and I’m pleased to share some additional details on our plan to begin reprocessing tailings from the Santo Antonio dam to Plant 1. We expect this initiative to deliver low-cost incremental ounces as Paul previously highlighted, as a result of several factors, which include the enriched grades near the tailings discharge portion of the dam. Utilization of excess throughput capacity which was the result of the ore blend strategy and a lower energy consumption as no crushing or grinding is required. We expect this initiative to come online in the fourth quarter and produce approximately 11,000 ounces this year. Another positive development for Paracatu is that we are now expecting potentially less power rationing in Brazil. The country has been experiencing a lengthy drought and we had therefore factored in a production loss due to potential power rationing in our 2015 guidance for the Americas. While the risk still remains, a better than expected rainy season has helped to replenish water levels to some degree. As such, we estimate that the impact to Paracatu’s production will not be significant as initially anticipated. As a result of these two factors, one lower than anticipated impact on production from power rationing and two, the expected addition of a 11,000 ounces from the tailings reprocessing, we do not anticipate any changes to our Americas regional guidance. Our Russia region continues to deliver excellent performance, producing a 186,000 ounces at a cost of sales of $476 per ounce in the first quarter. During the quarter we began to increase the proportion of higher grade Dvoinoye material going through the mill. Looking forward, we expect to process approximately 1,200 tons of DVOINOYE ore per day, which represents in the order of 25% of the total throughput, thereby increasing the overall grade to the plant. Our West Africa region produced 115,000 ounces at a production cost of sales of $800 per ounce. We continue to focus on optimizing our operations at Tasiast and have redoubled our efforts on increasing efficiencies and reducing costs. Since September of 2013, the site has identified approximately $150 million worth of continuous improvements and cost saving opportunities, ranging from the move to self-performing mobile maintenance to the closure of contract accounts and the introduction of lower-cost power supply. There have also been notable efficiency gains at our pit operations where, for example, productivity of our shovel operators are approaching best-in-class. Nevertheless, while these efforts help bringing cost down, we recognize there more needs to be done. We are testing a number of initiatives at this time. A further number of CR projects are already underway. Three small examples include: first, our plans to replace the gen sets that are currently powering the water pumping station with a transmission line to Phase 1b power station. This is expected to reduce power cuts in this area by approximately 80%. Second, an upgrade to the elution circuit, by increasing the size of the tanks and improving the heating circuit, we expect to generate an estimated annualized saving of $5 million. And third, we are focused on improving the reliability and efficiency of the comminution circuit in order to increase more throughput and offset the impact of the harder ore. With respect to Chirano, power rationing in Ghana, which began in December last year continued through the first quarter with the government increasing load shedding requirements to 33% from the initial 25%. We were able to mitigate the impact by reducing power usage in non-critical areas, prioritizing mining and milling operations, and utilizing backup generators. As a result, production in the first quarter was largely on plan. However, the use of backup power has increased our diesel consumption by approximately 50%. We have procured further generators in order to provide more flexibility and security to our power supply going forward, which we expect to be installed on sites by the end of the second quarter. To wrap up on operations, the first quarter was overall a solid start to the year. And we all remain focused on continuing to deliver on our commitments for the remainder of this year. I’ll now turn the call back over to Paul.

Thanks, Warwick. So as you have heard from both Tony and Warwick, this has been another good quarter for Kinross, both operationally and in terms of the balance sheet. We are continuing to deliver on our strategy, which we clearly set out in 2012. That strategy focusing on operational excellence, the pursuit of quality high margin ounces, disciplined capital allocation and balance sheet strength, has positioned as well in the current gold price environment. Going forward, we believe the financial flexibility and strong operational foundation that our strategy has established will continue to serve us well. With that, operator, I’d now like to open-up the call to questions. Thank you.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] First question today is from Patrick Chidley with HSBC. Please go ahead.

Good morning, Paul, everybody. Just a couple of quick questions. Firstly, on Ghana, I just wanted to get a better view on your power situation there. Do you have a power station there or are you investing in new power generating facilities there?

Patrick, I’m happy to answer that question. At the moment we are fed by the local utility ECG, and we do have on site power generating facilities, primarily focused at our metallurgical plant and to a lesser extend units that are located closer to our mining operations, specifically underground mining operations. They’re sufficient to take care of the critical production requirements. However, as I said in my talk, we’re securing further generating facilities so that we have greater flexibility.

Yes, thanks. So I just had the impression that maybe there was a coal fired power station being built, maybe I’m wrong on that?

There is a company by the name of GENSA that has been constructing a facility close to our operations. They’ve had mixed success in their construction process and to date they haven’t yet been able to fire up, and that’s still the current situation.

Okay, thanks. And then just quickly on the outlook for costs later in the year, can you give us some comfort or some guidance on -- was this supposed to be the best quarter on costs or do you think that its going to be fairly steady through the year here?

As far as West Africa is concerned, there is a slight increase to costs as you know the gold production in Africa, in terms of our guidance in comparison to 2014 had reduced. But I wouldn't see that being a significant change to where we currently are, specifically in Africa.

And for the [indiscernible]?

As far as production is concerned, we do pick up in the second quarter. As far as the third quarter is concerned, there is a decrease and that is where we see some of the impact of the losses associated with the heap leaches -- heap leach process at Maricunga. But further to that we really are happy to stay with our guidance.

Okay. So you don’t see any big -- any sudden increase in the next few quarters just because that was always the plan, just to make sure that you haven’t sort of stacked the costs later in the year deliberately?

No, I would suggest that the second quarter certainly will be a little bit better in terms of gold production and what you’re seeing this quarter primarily because of the ounce production that comes from Fort Knox. Fort Knox in the first quarter typically is a difficult quarter for us because of the extreme winter conditions. We also have the Round Mountain plant that is now re-commissioned at its full capacity. So there are two contributing factors to see a slightly better second quarter for this year.

Thank you very much. And last question, on La Coipa, you mentioned that some metallurgical work being -- having being undertaken. You’re still working on the plans for the prefeasibility study for Q3. Based on what kind of ore is that, is that oxide or is it oxide in transition. Can you fill out what the plan is a little bit more?

Yes. We have materials that could be derived from two different locations. The area of the Puren [ph] operation which was mined in the past is a material type that has got clay content and that gives reference or the cause to give reference to the metallurgical test work that we continue to do. The material that we are going to be processing and certainly the focus of the study are oxides in transition from the operations. The sulphides which we were hoping to pursue, we had established a scoping study to focus on those and primarily driven by metallurgical test work and that really has proven to be not viable, really because of the significant capital that we would need to put into the plant to deal with the processing requirements of the sulphides.

Right. And so the Puren area is one area, then the other area you mentioned was, which would be in the study?

Pompeya is the other area. And that is the area where we’ve been drilling ever since we closed the operation in 2013 into 2014, and we’ve had good success in that area. And that’s really what's given life to the improved situation we have.

[Indiscernible] Phase 7.

We call it as Paul just mentioned, Phase 7 of Pompeya.

Great. Okay. Well, thanks very much and well done on the quarter. Thanks.

Thank you.

[Operator Instructions] The next question comes from John Bridges with J.P. Morgan. Please go ahead.

Thanks everybody. Well done on the results. I was just wondering technically, your plan to put the recycle through plant number one. Is that going to be blended with the fresh ore as well or are you going to dedicate that to -- just to the trailings?

John thanks for the question and I’ll take this one. We will continue to operate plant one as it currently is. It is a blended mix of both the oxide and the sulphide, but in total it processes about 20% [technical difficulty] of the blended ore initiatives that we put together in 2014. There is some spare capacity in that plant and so we are taking advantage of that by bringing in the reprocess tailings and putting that downstream of the crushing circuit into the floatation process. And thereby blending that together with what comes through the mold from the pit.

Yes. Are you comfortable, you’ve done lots of tests to see that you’re not going to loose value into the tailing stuff? There have been problems before when miners have used this method and those guys did not have the benefits they expected. Are you comfortable, have you done enough test work on that?

We said we are aware of the problem that you’re talking about John and we have done an extensive metallurgical test work. And so we’re happy that we’re able to bring this information to you.

Okay. And what's the grade on the tailings?

It’s pretty low, and it varies as you would expect. The further you go from the point of their position out into the dam, there is quite a variation, but we’ve given it an overall average grade of 0.2.

Okay. And what's made -- what was the problem before that led to that value going out there? Was it just not enough treatment capacity or what's different now for the treatment process?

It’s not that at all. It’s rather a function of deposition. The dam dates back nearly 10, 15 years and for much of that period the deposition into the dam was in one area. And as a characteristic of gold as you would understand, with the specific gravity of gold we’ve found that the free gold that still remains in the very low grade tailings started to accumulate at that point of deposition. And we started to do some sampling in that area to find that, we’ve turned that back into the plant there would be some financial gain. And so it’s not something that is common throughout the entire dam, but rather at the point of deposition.

Quite fascinating -- fascinating. Okay, thanks a lot guys. Well done. Good luck.

Thank you.

The next question is from Greg Barnes with TD Securities. Please go ahead.

Yes, thank you. Warwick or Paul, can you give us some idea or concepts of what you’re thinking of La Coipa in the pre-feas, what scale you’re looking at, timing? Any kind of guidance on where you’re going?

I guess I’ll lead off, Greg. I mean, we’ve sort of been comfortable to say at this point is, we are working on that pre-feas and I’d say keep in mind it is a pre-feas related to new ore body with the plant that’s already in existence. Again, we want to finish that work before we come out and definitively tell you guys what we think and we’re targeting towards the backend of the year for that, but Warwick maybe you want to add.

Yes, thank you Paul. Greg, I mean our focus is to restart the existing plant with potentially some upgrades in certain areas. And so, we’d revert back to the regional size of that plant which was 15,000 tons per day. That is the prime focus. We’re on track for the completion of the prefeasibility study in quarter three as we had indicated. The results today are premature. I have got nothing to suggest that it’s not going well. So, I look forward to quarter three.

Okay. Thank you.

Thanks, Greg.

Next question is from Phil Russo with Raymond James. Please go ahead.

Yes, thanks. Good morning, guys. Just one question here, just your working capital or your cash positions already just grew over $1 billion in the quarter. Just -- what do you guys -- you got Tasiast deferred here. What do you guys consider is the a sustainable sort of working capital position going forward, what surplus here this cash that you might be able to put to work?

Phil, its Tony Giardini, I’ll take this. When we look at our cash position, typically we sort of look around $250 million to $300 million, the amount of cash that we like to have available from a working capital perspective. And that’s largely driven by really our ability to repatriate cash from the various jurisdictions in which we operate. I’d point out though that, whether its cash or actual liquidity, it really doesn’t matter. So the position that we’re in right now is, we’ve got $1 billion in excess or $1 billion of cash. We’ve got $1.5 billion of undrawn capacity on our revolver with roughly four years left to run on that. So we’re in extremely strong position from a financial perspective in terms of liquidity and on a working capital basis as I said looking at $250 million as the number. The other thing that I’d point out for the quarter is, what you’re seeing is actually some working capital improvements. Even though we paid down a reasonable amount of payable during the quarter with interest expense coming, being somewhat front end loaded, we’re still in an extremely strong position. And as we noted in our comments we did pay down a further $30 million of debt during the quarter with an additional $30 million due later this year, $250 million in debentures due next year. So, we think we’re in a strong position. We’ve got lots of flexibility going forward and the quick answer was, roughly $250 million to $300 million on cash.

Thanks, Tony. Thanks for the color. That’s great.

Next question is from Jorge Beristain with Deutsche Bank. Please go ahead.

Hi, good morning guys. I was just following up on a yearend analysis I did of all the reserves of the majors. And you guys have had some of the strongest drops in your life of mine over the last three years. And I was just wondering if you could just talk about sort of by region or by project where you actually see a replenishment of your reserve base starting to come from in the next few years given that you appear to have about 13 years of life of mine left at this point and dropped about two years just in the last period. So I just kind of want to know where you see the big buckets of growth, net growth and reserves coming from in the future. Thanks.

Sure, I’ll lead off, Jorge. I mean, I guess, I would say a couple of things just at a high level. I come back to our four guiding principles that we articulated back in 2012 really our strategy and one of those principles that we articulated was quality over quantity. And what that meant is, we’re not here to recreationally mine. And as a result I think we’re one of the few companies that chose to re-categorize our resources. And in some cases what that meant was our resource, our reserve number went down, but our grade went up, and our margins went up, and our NPV went up. So, in a lot of situations the ounces are still in the ground. Those were decisions we made in the context of the current gold price to run our business in a way that we continue to make money. So that’s point one, that has been an articulated strategy, and we’re probably a little different. Another thing we did which I think is, on the spectrum cruise [ph] up with that strategy as we’re one of the few companies that I’m aware of that fully loaded the costing on our reserves. And as you know, what constitutes an economic reserve is, as you make a penny, but that does not at all take into effect the true cost of mining. When we put out our guidance and when we do our mine planning, we want to make sure we’re going to make money. So we took an extra step of fully loading the cost on those reserves and again what that does is it re-categorizes, tightens up your resource number. Ounces are still on the ground, but we’re focused on where we’ll make money. I guess, the third thing I’d say is, other than Kettle River-Buckhorn, which we have communicated to the market will be winding down in 2016. We do have activities underway at all of our operations to extend mine life. And an example of that, that I don’t think the market’s really picked up on is, last year for example that Kupol, with underground drilling we replaced what we mined in the previous year. Now you’re sometimes limited in how far you can look ahead on those sorts of things, but there’s always things going on at all sites. We’ve touched on some of the new, again we’ve talked about La Coipa, we’ve talked about Chirano, we’ve added exploration ounces, all of that organic activity will continue really across the board. I don’t think more kind of I left anything there.

No, I think in terms of, it is of greatest interest those areas certainly we have a lot of land positions in and around La Coipa, Chirano and the Kupol, DVOINOYE area. And we also have in comparison to our competitors I believe a relatively large exploration budget. And so that budget has been very healthy over the last number of years and we see it continuing with -- given the prospectivity we have around those operations.

I guess, and I would just add one other comment as well. A big part of, if you’re looking it on a total aggregate basis, a big SKU there at yearend would have been the reclassification of 2P at Lobo-Marte to M&I. Again that’s really a technical point which related to as pulling a permit. Again, that we re-categorized we did not reduce, and that was about 6 million ounces.

Thank you. And just another question I had, it was in terms of your just kind of run rate on CapEx, you’ve provided a good breakdown in your PowerPoint on Page 34 of between the difference of sustaining and non-sustaining. But just -- if we were to think of your company in a kind of steady state out towards 2016, rough number is how much do you think is your sustaining CapEx is, is that $500 million a good baseline number I guess is the question? And secondly, of the amount that’s in West Africa which still seems to be a pretty large relative to the overall budget. How much of that is related specifically to Tasiast, and could you see a wind down in that CapEx spend going forward?

Sure, I’ll leadoff and maybe handoff to Tony or Warwick just to add more. But, I think what we have said historically is, kind of a rule of thumb, well let me backup. What we have said is, all of our assets are well maintained and have been for many years and there is no issues with respect to holding back on capital, that’s point one. Point two, a good run rate assumption for us and you can go back and sort of pick it out in the historicals is, for sustaining about $400 million a year is a good number. Now having said that, we did go up to $500 million this year, and that was not because we didn’t spend money in the past, we’re just at a point in the lifecycle where we had some additional spending. In fact we had some additional stripping at both Fort Knox and Maricunga. And as a result of that for this year only we’ve gone up to $500 million. So, I think I would stick with the $400 million as a good base case looking forward with the operations we have. Maybe on the Tasiast point …

Sure, maybe Paul its -- Jorge, its Tony. For West Africa this year we had sort of had sustaining capital of $70 million anticipated. There was additional capital that we classified as non-sustaining which really relates primarily to West Branch stripping. In terms of our spend for the quarter, we’re a little behind sort of a pro-rata rate in terms of where we came in and where we’re -- somewhat under-spent really across the board including Africa. But at this point we haven’t made any change to our guidance for the year and would be likely looking at that later in the year. In terms of longer term other than what Paul has provided on where we see sustaining capital, we haven’t provided guidance beyond the current years and we’re really not in a position to do that.

Okay. Thank you.

Thanks.

There are no more questions at this time. I’ll turn the call back over to Paul Rollinson for closing comments. End of Q&A

Great. Well, thank you operator, and thank you everyone for participating and we look forward to speaking with you on our next quarter. Thank you.