Kinross Gold Corporation (KGC) Q3 2017 Earnings Report, Transcript and Summary

Thank you for standing by, this is the chorus call conference operator. Welcome to the Kinross Gold Corporation Q3, 2017 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 would like to turn the conference over to Mr. Tom Elliott, Senior Vice President, Investor Relations and Corporate Development. 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; Lauren Roberts, Chief Operating Officer and Paul Tomory, Chief Technical Officer. Before we begin, I would like to bring your attention to 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 information, please refer to Page 2 of this presentation, our news release dated November 8, 2017, the MD&A for the periods ended September 30, 2017 and December 31, 2016, and our most recently filed AIF, all of which are available on our website. I will now turn the call over to Paul.

Thanks, Tom. I’m pleased to start off by reported that Kinross is firmly on-track to meet both our company wide and regional guidance for the sixth consecutive year. In fact, with strong production and good cost performance in the first nine-months of the year, we are tracking towards the higher end of the range on production and the lower end on cost. Q3 marked another strong quarter for Kinross. Overall, our operations performed well including some standout results at Tasiast and our two mines in Nevada. We had a strong quarter financially generating approximately $320 million of adjusted operating cash flow and we are making solid progress on several important development projects. Let me take a few moments to highlight some key achievements in each of these areas. In addition to solid performance by Fort Knox and Kupol, Tasiast, Round Mountain and Bald Mountain all had a particularly strong third quarter. Round Mountain hit a record high mill grade and further drops of cash costs on the back with of strong production. Bald Mountain more than doubled its production year-over-year and achieved its highest quarterly production to-date and Tasiast saw a seven year high in mill grades, while cash costs declined to just under $740 per ounce. Turning now to our Paracatu operation, I’m pleased to report that we restarted mining and processing activities in early November following the production curtailment due to lack of rainfall. Our team at Paracatu has continued to work hard on permanent mitigation solutions for the lack of rainfall. This site is well prepared to ramp up to normal production levels during the fourth quarter and Lauren will provide you with more detail on the situation shortly. With respect to our financial results, which Tony will speak to in greater detail in a moment. I would like to mention a few highlights. We generated significant operating cash flow in the quarter and our balance sheet has remained strong with approximately $1 billion of cash and total liquidity of approximately $2.5 billion. This position us well to invest in our exciting organic development projects. In mid-September, we released results of the Tasiast Phase Two and the Round Mountain Phase W feasibility studies and announced that we are moving ahead with both projects. Both of these projects leverage existing infrastructure, benefit from considerable at site operating experience, strengthen our longer term production profile and are expected to generate significant cash flow. The approval of these projects represents an exciting new chapter for Kinross. In September, we have ramped up development activities at both projects, advanced engineering and started procurement activities for long lead items. Paul Tomory will provide more details, as well as an update on Tasiast Phase One, which is progress very well and is on-track to achieve full commercial production towards the end of Q2 2018. In early October, we hosted a mine tour at Tasiast, which is well attended by both analysts and investors. It was a great opportunity to showcase the excellent progress we are making on the construction Phase One and to highlight the additional benefits of Phase Two. As for the Vantage complex located in the South area of the Bald Mountain property, engineer continues to advance as planned and we are on-track to commenced initial construction activities in the first quarter of 2018. And in Russia, the development of the twin declines at Moroshka is proceeding on-schedule with the construction of surface infrastructure now complete. So to summarize, we are on-track to meet our guidance for the sixth consecutive year. We are making excellent progress on our projects, and we have the financial strength and flexibility to fund significant investments in our business over the next three years. With that, I'll now turn the call over to Tony for a review of our financial results.

Thanks Paul. Q3 was another strong quarter driven by solid production and 654,000 gold equivalent ounces and good cost performance with cost of sales of $662 per ounce. We generated approximately $320 million in adjusted operating cash flow during the quarter and approximately $200 million in net operating cash flow. Despite strong cash flow generated during the quarter, our net operating cash flow was impacted by two factors. One, seasonality, particularly in Russia where we both procure and make deposits for supply during the third quarter for the winter delivery cycle. And two, unsold inventory produced at Maricunga that would continue to halt and expect to sell throughout 2018. Operating earnings increased to $80 million contributing to an increase in reported net earnings. Reported net earnings were $0.05 per share and adjusted earnings were $0.07 per share. I would like to provide some additional color on three other items in the quarter, namely taxes, other operating cost and capital expenditures. First, we have recorded a tax recoveries in the quarter of $10 million, which was largely a function of the reversal occurred tax expense at Paracatu as a result of a curtailment and the foreign exchange impacts on deferred tax balances in Brazil and Russia. Second, other operating costs showed Q3 included $15 million related to Paracatu. During the quarter, the Fed reduced its aggregate study by 40% compared to normal levels. Other spending that did occur during the quarter 25% or $15 million was categorized as other operating costs. We now expect our other operating cost for 2017 to be in the range of $140 million to $150 million. This is mainly the result of the Paracatu curtailment, that and other related items and Kettle River reclamation cost. Third, capital expenditures in the quarter were $205 million, bringing our spend for the first nine-months of the year to $584 million. With the approval of the Tasiast Phase Two and Round Mountain Phase W project, we expect to incur approximately $16 million of additional capital expenditures related to these projects over the remainder of 2017. Notwithstanding these additional expenditures, we are maintaining our original guidance for CapEx of $900 million plus or minus 5% for the year. Turning now to our balance sheet. Our overall liquidity remains robust at $2.5 billion, with no debt maturities prior 2021 we are in a strong position to invest in our future development opportunities. I'll now turn the call over to Lauren for review of operating highlights.

Thank you, Tony. With good production and cost performance over the first nine-months of the year, all three of our operating regions are on-track to meet their production and cost guidance. Our mines in the Americas performed well in the quarter producing approximately 287,000 ounces. Cost of sales of $691 per ounce declined by approximately $90 per ounce or 12% year-over-year. This was driven by strong performance at several mines in the region including Fort Knox, Round Mountain and Bald Mountain. At Fort Knox production benefited from the expected seasonal increased in heap leach processing. Round Mountain increased production by 30% year-over-year, largely driven by the highest mill grade we have seen since becoming the operator back in 2003. Cost of sales at Round Mountain also declined to a five-year low of $626 per ounce as the operation benefited from lower labor and contractor costs. Bald Mountain recorded its highest quarterly production since we began operating the mine. The operation also achieved a new record per monthly production producing over 40,000 ounces in September, grades are up at Bald as anticipated and we are reaping the benefits of the significant amount of material that has been stocked on the heaps. I’m very pleased to say that Bald is solidly on-track to double its production this year as compared to 2016. Turning to Kettle River, the mill processed the remaining stockpiles from Buckhorn in September. Originally slated for closure in 2015, this operation continue to outperform expectations producing an additional year and half, while delivering solid production, good costs and strong cash flow. Reclamation at the mine site is now well underway and we are continuing to advanced exploration activities in the Curlew District. At Maricunga, we continue to rents material that was placed on heaps prior to the suspension of mining activities last year. Production increased quarter-over-quarter and we expect to see similar production from Maricunga in the fourth quarter. Care and maintenance activities will be the focus starting in 2018 as we expect residual production from Maricunga next year to be minimal. I would like to turn now to Paracatu, where we have resumed mining and processing activities after receiving sufficient rainfall in late-October. Although, Plant 2 operations have been curtailed beginning on July 3rd due to lower than average rainfall in the Paracatu region. We are able to increase the reprocessing tailings from Plant One to approximately 50,000 tonnes per day, which continued until mid-September. Paracatu Two produced approximately 47,000 ounces during the quarter, which exceeded our expectations. We expect to ramp production backup to normal levels during the fourth quarter as sufficient water becomes available, which the site is well prepared to do. Our mitigation measures in advancing well and we expect Paracatu to be more drought [indiscernible] going forward. Turning to our West Africa regions. Our two mines produced approximately 121,000 attributable ounces for the quarter at a cost of sales of $734 per ounce. [Cash] (Ph) continue to outperform which record high grades from less branch and enhanced mill productivity contributing to strong production and cost of sales of $738 per ounce. Moving to Chirano, higher grades from underground operations contributed to strong production in a two-year low in cost of sales of $730 per ounce. As we previously mentioned, we completed surface mining operations earlier in the year. We are now sourcing exclusively from the underground mines and stockpiles which provide sufficient ore to keep the mill running at full capacity. The Russia region produced approximately 146,000 ounces for the quarter at a cost of sales of $524 per ounce. As expected, and consistent with the mine plan, lower mill grades resulted in lower production year-over-year. However, the region remains a strong performer of consistently achieving costs among the lowest in our portfolio. It is worth noting that September Northeast contributed high grade material for the mill feed, with grades of approximately 20 grams per tonne. We began mining September Northeast in Q2 and we expect to complete our operations at the small but very high grade deposit in the fourth quarter. In summary, all of our regions performed well, despite the weather related curtailment at Paracatu, our operations delivered strong productions with many hitting multi-year lows in terms of cost and we are on-track to meet our guidance targets for the year. I'll now turn the call over to Paul Tomory for an update on our development projects.

Thanks Lauren, over the past three months we have made significant progress in our suite of Brownfields project. In particular the September decision to proceed with Phase Two and Round Mountain Phase W, we have made very good progress in a short period of time in establishing the execution teams and awarding engineering contracts. Let me start first by giving an update on Tasiast Phase One expansion which is progressing well and remains on budget and on schedule. Plant construction is now 77% complete, with the last three months running at peak staffing and construction activity levels. We commenced installations of the crusher and the associated shouts, while construction of the two main conveyers from the crushers and stockpile [indiscernible] nearing completion. At the site now, the most difficult crane – the entire project is complete and the gearless motor drivers in place. Work has begun on the stage and winding while structural working in the - area is well ahead. We have also made significant progress in the downstream area including installation of cyclone towers, three leach tank, the illusion circuit and various screens and pumps. Additionally line electrical works are ramping up across the project and [indiscernible] facility is complete and are ready to produce. [indiscernible] engineering which ramps up immediately following the go ahead decision in mid-September is now approximately 25% complete. We start procurement for long lead time items most notably the power plant, and we have finalized the commercial terms for the EPCM contracts. We're on-track to start construction of Phase Two in early 2019. Turning now to Round Mountain Phase W. we expect to begin stripping initial construction work in early 2018. Over the couple of months, we continue to advance detailed engineering on [indiscernible] including the truck shaft, new leach pad, processing infrastructure and we begun procurement of long lead time items in mining equipment. We received the decision [indiscernible] on October and State permitting is continuing on schedule. Related to Bald Mountain Vantage Complex project, overall engineering is now approximately 70% complete and procurement activities have begun. The heap leach construction contract is expected to be awarded in the next month. In addition, permitting is proceeding as planned and site preparations begin so that we can begin the initial construction activity on schedule in the first quarter of the New Year. And finally at Tasiast, we're making good progress on pre-feasibility study which contemplates the dump leach project located approximately 10 kilometers south from main Tasiast ore body. The potential project here could combine material from multiple deposits in the area for dump leach operation, the high grade portion is expected to be transported to the Tasiast mill. The accelerated infield drill program has encouraging results and we expect to see mineral resource additions at year-end. In summary, we are making excellent progress on all of our Brownfields projects and are focused on key milestones for the next year which includes start up of commercial production at Tasiast Phase One and the expected startup of construction of three projects. Tasiast Phase Two and Round Mountain Phase W and the Vantage Complex project. With that, I'll turn it back to Paul.

Thank you, Paul. In closing, we are very pleased with our Company is performing both across our existing operations and our development projects and to reiterate we are well positioned to deliver on all of our priorities and guidance targets for the year. I would also like to thank all of our employees whose hard work and dedication make our success possible. We had a very good third quarter, our portfolio of mines continues to deliver, we have a strong balance sheet and all of our organic development projects are advancing according to plan. With that operator, I would now like to open up the call to questions. Thank you.

Thank you, sir. We will now begin the question-and-answer session. [Operator Instructions]. The first question comes from Steven Butler of JMP Securities. Please go ahead.

Well good morning guys. Great quarter, congratulations. In terms of the Paracatu Lauren, you talked about mitigation efforts to sustain higher levels of water availability at site. Can you maybe just comment a bit further there? If you had repeat of this year’s drought next year, would you expect to be in better position?

Well good morning Steve and thank you for the question. I just want to remind you firstly what we initially did very early in the drought cycle and that was to focus our efforts on conservation and maximizing the on-site capture of water. Those two things were immediately within our control and that work is now complete. We also went about securing some additional water rights through some land acquisitions and that work has yielded some positive results and it is continuing to go forward, but the other piece of the puzzle as you are aware are the projects that we are developing to bring groundwater into the site. And we have broken those into three projects called [ Aqua ] (Ph) One, Aqua Two and Aqua Three. Aqua One is complete and it has put is in a position that we can tolerate about an 87% of average precipitation event a rain year. Aqua Two is nearing completion and it will bring us up to about an 80% sustainability rate. And we will launch Aqua Three as soon as Aqua Two is done and we expect Aqua Three to put us into a position where we should be able to tolerate about a 65% of annual precipitation year. And the Aqua Three project, because it’s starting in January will not deliver the full results inside of the calendar year 2018. So in 2018, we would expect will be able to tolerate about 70% year.

In essence what are the series Aqua One, Two, Three. What are they represented as?

They are the development of groundwater aquifers and the infrastructure necessary to deliver that water to the site.

Okay sounds fine. And you had - just to reiterate. You said, you had a record month or was it a record quarter at Bald Mountain or record month in September at over 40,000 ounces. And do you see sustainability of September numbers into the fourth quarter?

I’m sorry, the last part of the question sir?

And do you expect to September numbers to sort of linger into the fourth quarter?

Okay. So yes, it was a record production quarter and September was a record month. We think a life of mine record month actually. So the October results should look similar to September, and as you will recall we were heavily backend weighted on the production for calendar year 2017. The site team has done an extraordinary job of pulling forward ounces. and so we have been able to shift that backend weighting a little bit more into Q3 and a little less into Q4. And so after October we will see some reduction in the production levels, but we remain solidly on-track to deliver the guidance of at least doubling production.

Okay, Thanks Lauren. And then lastly just Tony maybe on Kettle River reclamation cost, what does it look like there on spending in the fourth quarter and into next year?

Steve thanks for your question. At this point we're putting the budget together for 2018, so we don't have a definitive number for next year. The reference to Kettle River in terms of other operating cost was effectively an increase in the reclamation liability. And that really came about because we effectively completed production in the third quarter although I did notice that there is going to be a few ounces [indiscernible] particularly in the quarter. But nonetheless, we as a result recorded about $12 million adjustment for the reclamation liability. But that not actual cash expenditure that's really just the truing up of the - liability. So as we develop the budget for next year we will have a better sense of [indiscernible] happy about taking you we have those findings in February.

Okay that's sounds great. So it was a Q3 adjustment already reflected?

Yes.

Okay, yes thanks. Got it thank you guys.

The next question comes from David Haughton of CIBC. Please go ahead.

Good morning Paul and Tim thank you for the update. Tony maybe I could start with you, quite the shortfall of sales compared to production at Bald Mountain. Do you expect for that to be up in the fourth quarter?

Well at Bald Mountain what is that’s happening is some of the - we have an agreement with [Barrick] as part of the original acquisition and some of the carbon is actually processed through their facilities in Nevada. So in some cases what we end up having is a bit of timing gap between the delivery of carbon. So it will really depend on overall timing of production across the quarter and we will have a better sense of it as we move into Q4. But it is possible that some of our production in Q4 will get pushed into the first quarter as far as sales goes, and we will just have to see how things play themselves out, but it's pretty much as we have expected in terms of timing. So we're targeting as Lauren said a doubling of production hoping that with pulling some of these ounces forward we will have more flexibility on the sales side. But it could be that some of it drags into the first quarter of next year.

In very rough figures. What kind of proportion of the gold is shipped to Barrick in the loaded carbon.

While we have a portion that is going to our own facility at Round Mountain and so we're probably 50/50 right now. And we're slowly looking for opportunities to obviously increase what we process at our own facility, but right now it's probably running 50/50.

Well at Bold Mountain perhaps for Lauren this time. Can you be a little bit more specific about what your expectation is going forward, I mean the third quarter that was really quite stand-out. And I’m just wondering how we should be resetting our expectations going into 2018 and beyond. Should we see the average grade coming closer to reserve grade and what kind of throughput would you anticipate from this line?

Hi David. Yes. So we would anticipate the grade become more in line with the reserve grade going forward and consistent with the guidance that we provided at the time of acquisition, we would expect to be next year in the range of 250,000 to 280,000 ounces.

Okay and given the success that you have had especially in the last quarter and building up through the course of the year. Would it be more at the higher end of that do you think or should we just take a middle of the road to conservative view?

We are in the process right now of finalizing mine plans and budgets. So it’s a little early for me to say, but I would say, we are going to be more mid-point.

Okay, mid-point works for me. Going down to Paracatu now, heard discussion on the water mitigation various basis of plans you have got there. But trying to translate that into how we should see the production in the fourth quarter. Could you rebound back to what we have been seeing for instance in the throughput in the first and second quarter of 2017, should it go backup say for towards going to the mill, a 110,000 tonnes a day kind of level?

Yes. Since I suggest we would look at that David. Paracatu is about a 500,000 ounces a year producer round number. So that under normal operation is going to give you about 40,000-ish announce as a month. So October, we actually did receive average rainfall, which October is the first month of the rainy season. But it all came in the last 287 month. So we got a little bit of a slow start with the rainy season. We are now operating both plants and the tailing is reprocessing, we have enough precipitation to allow us to do that. So we are ramping backup to full production. And it’s going to be dependent on consistently of rainfall at this point. But assuming that we have got the water kind of 40,000 ounces a month is probably a reasonable run rate.

Alright. Thank you very much guys. I will leave it there.

The next question comes from Andrew Kaip of BMO. Please go ahead, sir.

Hi thanks. Lauren, just to follow-up on Paracatu. You are ramping up to full production rates at Plant Two. So when do you expect to achieve those full rates?

So Plant Two, I would give it about a week probably, it takes a little while, you know it’s a big facility, 120,000 tonnes a day huge SAG mill for ball mill, it takes a little while to get everything round up and operating consistently.

So by mid-November you should be up to the, sort of 40,000 per month range or production range?

Quarter allowing, yes.

Okay, thank you very much and congratulations everybody on a decent quarter.

[Operator Instructions]. The next question comes from Anita Soni of Credit Suisse. Please go ahead.

Hi good morning guys. Just one question on that other operating costs increase that happened this quarter. How much of that increase do you expect would be something that would carry over and continue on into 2018?

That's good question Anita. We call it other operating costs, so I think it's a difficult thing to assess at this point. We will be coming up with the project in February and we will give you the - on that number. But it has been a number where we have had some changes in our guidance during the course of the year. What we have indicated at this point is that when we look into the fourth quarter, we see a range in 140 to 150, and that's really predicated on expecting some additional curtailment cost for Paracatu for the month of October more than likely as Lauren highlighted. We don’t see any impact for the rest of the year. And then we will see some holding care and maintenance cost continue with respect to Maricunga and La Coipa. And then there is some anticipated other cost will be categories as other operating costs in the quarter. So we feel pretty good about 140, 150 number from a guidance point of view. As far as 2018 goes, too early to really speculate as to where we might see that but we will include that with our guidance in February.

Does that also include the VAT, like how much of that was the VAT and royalties?

In the quarter? Right so, what we had was roughly about $8 million was VAT related. And some of it actually relates to what we would term uncertain tax position that were set up for non-income tax related guidance that output into that account. So that includes that amounts, so it's not all VAT. And the VAT adjustments are twofold partly with respect to Brazil and some of the changes that we have seen in the State and Federal legislation on that. That some of it relates with respect to accruals that we have had for VAT in Mauritania.

And then just in terms of Paracatu, sorry if I missed this. But you guys are working on getting additional water sources. But in the meantime, we are working at curtailments of the foreseeable future right, in the third and fourth quarter?

So, Anita I just want to clarify when I gave you the number on that. I just want to include the Paracatu component of 40 million in output which is about 7.5 million. And it's the similar not the Paracatu it's cumulative during the quarter was about 15. And with respect to curtailment maybe I'll just sort of [indiscernible]. Well at this point, we expect to pick up a portion of the cost in the fourth quarter. As far as next year goes, once again we have got an accounting policy in place that will deal with any curtailment implications and we will look at the component of cost that we would transfer another operating cost [indiscernible].

Anita this is Lauren. We are back up in running now with all the plants. We're ramping them up to full capacity and we should be there in about a week.

Yes. I'm just wondering for next year and year after, is it going to be typical that you will be budgeting for curtailments in the third and part of fourth quarter?

Well it's really a mother nature question Anita. we sometimes talk about it as sort of two rainy seasons, but that’s something because we bifurcate it with the calendar year-end. The rainy season starts now and it will run through the calendar year-end into January-February. And the point here is usually by the time we give guidance in mid-February, we have got a sense of how much rain we have already received and that’s how we have managed in the last couple of years to basically the take a bit of a handicap expecting a curtailment, because we started the year with less than average. And that just going to - we are just going to have to wait and see what mother nature delivers as we go through the rainy season here.

Alright. Thank you very much.

Our next question comes from Tanya Jakusconek of Scotia Bank. Please go ahead, Tanya.

Yes good morning everybody and congratulations on a good quarter. I have one technical question maybe for Lauren and accounting question for Tony. Just Lauren on Round Mountain, we have 1.73 grams per tonne going through the mill this quarter. What does the grade profile look like for Q4 and then into 2018 I mean that’s a really good grade?

Yes it was an excellent grade, we are quite happy with it. So Tanya the way it will work is we are mining right now in the bottom of the pit in a very high grade phase of the pit. And in Q3, we are in a particularly high-grade portion of that phase. So Q3 were outstanding mill grades. Q4 will come back down a little bit into a more sort of average for the year range. And then maybe I will just pass it over to Mr. Tomory, who can talk about Phase W going forward.

Yes hi Tanya. I think we talked about on a project call. Grades around that will be quite variable over the life of the remaining mine. For the rough way to look at it is average grade in the mill will be around 0.9 for the life of the mine. And obviously in the leach pad, it will be around 0.6 and that gives you blended reserve grade, but as we have talked about, it will be up and down.

Okay. So for Q4 are we going back down to that 1.35 or that we saw in Q2 or are we going to further down than that?

Yes. It will be going at around 1.1 in 2018 and there will be roughly a linear drop to that.

Okay. And then maybe just coming back to Tony. So I just wanted to ask about all of these VAT additional costs that we are incurring. Are we looking at running those through the cash costs going into 2018 and so forth, because, I mean, sometime you wonder are these should be running through your operating costs?

Well I mean at the end of the day what happens with most of these VAT related charges and this is part of the challenge. If they were occurring within the same time period, I think [indiscernible] but unfortunately what happens is that some of these VAT buildups occur from actual previous years. And so working to recover them on a timely basis, but it doesn’t always play out that way. So if you put them through cash costs, effectively obviously in the cash costs during that time period, because it doesn’t relates to that time period and as a result they end up going through other operating costs. Now we would hope that particularly in Tasiast, where we have a plan in place to reduce the amount of VAT recoverable as a result of having a VAT exception or a good portion of our spend at VAT it will reduce some of the - we have those amounts having been covered. But it's not certain. And you know I would say that when we look at our cost we're probably running 80% of VAT cost. Sorry we're running a portion of that cash cost through those VAT cost through cash cost already. But it is a very good thing that changes from the period-to-period. So as I said, there is a cumulative amount [indiscernible] during the quarter throughout VAT. So it's approximately [indiscernible] what it was. But most of its related to prior period.

I appreciate it's hard, but just maybe on the forecasting side. Okay, that's great, thank you.

There are no more questions at this time. This concludes the Question-and-Answer Session. I'd like to turn the conference back to Paul Rollinson for any closing remarks.

Thanks operator and thank you to everyone for joining us today. We will look forward to catching up with you in person hopefully in the coming weeks. Thank you.

This concludes today's conference call. You may disconnect your lines. Thank you for participating. Have a pleasant day.