Kinross Gold Corporation (KGC) Q1 2018 Earnings Report, Transcript and Summary

Good morning. My name is Chris and I will be your conference operator today. At this time, I would like to welcome everyone to the Kinross Gold Corporation Q1 2018 financial results conference call and webcast. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. At this time, I would like to turn the call over to Mr. Tom Elliott, Senior Vice President, Investor Relations and Corporate Development. Mr. Elliott, you may begin your conference.

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 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 08, 2018, the MD&A for the period ended March 31, 2018 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 would just start by saying our intention this morning is to do our traditional report out on the results of the quarter and then after we've reported out on the quarter, I will come back and make some remarks about the recent developments in Mauritania. So as it relates to the quarter, with strong production and excellent cost performance across almost all of our operations in the first quarter, we are firmly on track to meet our 2018 guidance targets for production, costs and capital expenditures. Lauren will have more detail on our operations, but I'd like to point out a few highlights for what I consider to be a very strong operational quarter. Bald Mountain continued to achieve very strong results and in the first quarter was the lowest cost mine in our portfolio. Fort Knox also had an excellent cost performance, with cost of sales down 15% versus Q4. And Paracatu delivered strong production of 128,000 ounces in the first quarter and I should also note that at Paracatu, we've seen significant improvement in rainfall so far in 2018 versus previous years. A combination of strong production from our portfolio of eight operating mines, low costs and higher than budgeted gold prices resulted in significant operating cash flow generation during the quarter. As a result, our cash position is largely unchanged from the start of the year, even though we have invested approximately $250 million of capital expenditures during the quarter. We currently have robust liquidity of 2.6 billion, including approximately 1 billion of cash. The quality of our balance sheet provides us with the financial strength and flexibility to invest in our future. With respect to our portfolio of development projects, I'm pleased to report that we have continued to make progress. Tasiast Phase one is nearing completion. Our two projects in Nevada, Phase W and Vantage are advancing well. Mining at the Moroshka satellite deposit is on schedule to start up in the second half. We've made excellent progress on the Gilmore feasibility study and look forward to sharing the results in mid-June. And we are advancing the La Coipa restart project to a feasibility study following good progress on the permitting front. So, I'll reiterate, our operations continue to generate solid results and our balance sheet provides the financial strength to invest in our projects and development opportunities. I’ll now turn the call over to Tony for a review of our financial results.

Thanks, Paul. The combination of continued operational delivery, excellent cost performance and a higher realized gold price delivered very strong first quarter financial results. Particularly noteworthy is our all in sustaining cost of $846 per ounce which is the lowest it's been since we began reporting on this metric in 2012. While the average realized gold price increased by 9% year-over-year, our margin per ounce sold expanded by 29%. As a result, adjusted net earnings for the quarter were one $125 million or $0.10 a share, which is also a significant increase over the same period last year. As well, our operations generated approximately $364 million in adjusted operating cash flow, an increase of 45% compared to Q1, 2017. As Paul mentioned, with strong first quarter results, we are on track to meet our guidance for production, cost of sales and all in sustaining cost for the year. Capital expenditures for the quarter were just under $250 million. We remain on track to meet our expected capital spend of approximately $1.1 billion plus or minus 5% as we expect capital spending to ramp up through the year. During the quarter, we took advantage of weaker local currencies to add to our FX positions. Our strategy in this regard is aimed at managing near term risk related to fluctuations in foreign exchange and input commodity prices. Our overall FX exposure for the year is approximately 36% hedged at favorable rates compared to spot. We will continue to monitor our FX and oil exposure and look for opportunities to establish additional input cost hedges if price conditions are favorable. Turning now to our financial position, our balance sheet remains robust. We have approximately $1 billion of cash, a total of $2.6 billion in liquidity, no debt maturities prior to 2021, a trailing net debt to EBITDA ratio of approximately 0.6 and strong cash flow generation from our portfolio of mines. I'm pleased to remind you that during the quarter, S&P updated our credit rating to investment grade, recognizing our long track record of maintaining good credit metrics and our consistent operating performance. To sum up, we are in a strong financial position. Our focus on disciplined capital management and the strength of our liquidity position will continue to be priorities for 2018. I’ll now turn the call over to Lauren for a review of operating highlights.

Thank you, Tony. We delivered excellent results during the first quarter in each of our three operating regions. Our mines in the Americas produced approximately 421,000 ounces for the quarter at a cost of sales of $670 per ounce. Production at Fort Knox was in line with our expectations for the quarter, although it was lower compared with the fourth quarter of last year. This was mainly due to lower mill grades as well as the seasonal slowdown of ounces recovered from the heap leach. Cost performance was good, with cost of sales 15% lower compared with Q4. As we mentioned in our press release, there was a pit wall failure at Fort Know during the quarter. It was relatively minor and these occurrences are not uncommon for an operation of this scale. However, it is limiting access to certain areas of the pit. We are assessing this situation and the remediation efforts are underway. At this time, we do not expect any negative impacts to our overall regional guidance for the year, but we may see lower production and expect to see higher costs at Fort Knox for the rest of the year. Turning to our Nevada assets, Round Mountain delivered production in line with the previous quarter. Cost of sales improved as a result of lower operating waste and an increase in mill grades, which was both higher than Q4 and above our expectations. At Bald Mountain, we saw excellent performance as the mine continued to benefit from the significant number of ounces that were stacked in the second half of last year. Both production and cost of sales were in line with our expectations and represent significant improvements from where costs were a year ago. Moving to our mine in Brazil, Paracatu had a good quarter with respect to both production and costs. Production benefited from higher throughput and recoveries, while costs benefited from lower contractor costs as well as favorable foreign exchange movements. I'm also very pleased to report that rainfall in the areas surrounding Paracatu has been much stronger than in the past few years. With year-to-date rainfall levels at approximately 90% of the historical average and our mitigation efforts advancing ahead of schedule, we’re in a much better production position for the rest of the year. Turning to Africa, the region produced 113,000 ounces at a cost of sales of approximately $751 per ounce. Production at Tasiast was in line with our expectations for the first quarter. The slight decrease from Q4 was mainly due to expected lower grades and decreased throughput due to a planned 7-day mill shutdown to tie in some of the Phase one infrastructure. The ramp up of mining rates in support of the expansion project is proceeding according to plan and is expected to reach 100 million tonnes this year. Moving to Chirano, the mine continues to perform well. Lower production compared to Q4 was mainly a result of lower grades, but finding and processing rates and recoveries were strong. During the quarter, we completed a raise on the tailings facility, which is expected to provide sufficient capacity for the remainder of the mine life. Turning now to Russia, Kupol and Dvoinoye together produced 120,000 ounces at a cost of sales of $527 per ounce. Production was in line with our expectations and our Russia region remains a strong performer, generating good margins and cash flow and we are continuing to pursue opportunities to extend mine life. Development of the Moroshka satellite deposit continued on plan. And we expect to begin mining ore in the second half of the year. We also commenced mine development at the Dvoinoye’s zone one deposit, which is located between the current mine and the camp. We have begun earthworks, construction of roads and Portal entrances. Overall, it was a strong start to the year and we expect to continue to deliver in the coming quarters. I'll now turn the call over to Paul Tomory for an update on our development projects.

Thanks, Lauren. Over the past quarter, we've made very good progress on our suite of brownfields projects. Starting with Tasiast phase one, which is nearing completion, we've made excellent progress. The project is on budget and on schedule to reach 12,000 tonnes per day by the end of June and Tasiast itself is on track to meet the 2018 gold production estimates, which were contemplated in the feasibility study. We now successfully commissioned several components of the project, including detailing storage facility, upgrades to the power supply system several ancillary facilities. We are in the advanced stages of commissioning the new primary crusher, which is sites to the phase 2 throughout capacity of 30,000 tonnes per day. The crusher itself has been running a number of tests and we've achieved design throughputs. Construction is complete for the new components of the CIL plant, which includes the ball mill cyclones, new leach tanks, elution circuit screen, intensive leach reactor and a number of other components. These new elements have been successfully tied into the existing mill and the shutdown that Lauren referenced and commissioning is going very well. At the SAG mill, it is 97% complete and while we commission the SAG, we plan to temporarily use a buyback. This in combination with a new primary crusher in the CIL plant modification is expected to achieve throughput of 12,000 tonnes per day. During initial test runs in the past couple of weeks, the plant has reached throughput rates in between 11,000 and 12,000 tonnes per day and we've also pre-crushed a total of about 50,000 tonnes, using the new primary and existing secondary crushers, all of which is awaiting for us to see through the CIL plant. Last night, we also posted a video on our website, featuring a recent footage of the expansion and I'd encourage you to have a look for yourself to see how it has progressed. Moving over to Nevada, around Phase W, detailed engineering is approximately 90% complete and we started grading the new heap leach pad area and began earthworks in the infrastructure area. We've also commission two new electric rope shovels, which are now in operation to support certain activities, of which have advanced on plan. At Bald Mountain, Vantage complex project engineering is also 90% complete and the majority of procurement packages and construction contracts have been awarded. All major permits are also now in place and earthworks at heap leach are well underway. We remain on track for expected commissioning of the heap leach pad and processing facility at Bald in the first quarter of 2019. Turning to Chile, we’re to continuing to look at additional future development opportunities and particularly at La Coipa and Lobo Marte. With permitting events well underway, we’re planning a feasibility study as Paul mentioned in the middle of this year. At the same time, we are considering our options for how Lobo Marte may fit into our pipeline. This deposit you'll recall is located 80 kilometers by road from Lo Coipa and has an estimated 7 million ounces of M&I resources at 1.2 grams per tonne. Those were early days, but one concept that we're thinking about is the potential to start production at Lobo, following the end of La Coipa’s mine life. This could add a new project in the 2025 to 2026 timeframe. In summary, we've made very good progress on our projects and we look forward to updating on a number of important milestones later in the year, including completion of Tasiast Phase 1 and the upcoming results that yield more feasibility study. With that, I'll turn the call back over to Paul.

Thanks, Paul. So I'd like to now make some commentary regarding the recent developments in Mauritania. And as previously disclosed, Tasiast Sud has been the subject of a pending application process to convert it from an exploration license to an exploitation license. As noted in our news release, we have been in negotiations with the government, respecting an earlier rejection of our conversion application. In addition to reaffirming the rejection of the Tasiast Sud conversion, yesterday, the government also indicated that it is willing to engage in mutually beneficial discussions, regarding all of Kinross’ activities in the country. We understand the government is looking for a proposal by Kinross to provide greater economic benefits to the country. I'd like to stress four key takeaways. One, we have operated successfully with good government support in Mauritania for the past eight years. We have developed an excellent Mauritanian work force. Three, as discussed, the Tasiast phase 1 project is nearing completion. And four, interestingly, with the majority of phase one spending now behind us, our balance sheet is even stronger today than when we started construction on phase one. This recent development reinforces the risk mitigation benefits of a two phased expansion. Even as a standalone project, phase one is an excellent mine with substantial low cost production and robust margins and we look forward to its contribution to our portfolio of mines. With this recent development, we are assessing the government's request, including the implications for the Tasiast phase 2 development. We are a large company. We have a diverse portfolio of assets located around the world and from time to time, we encounter issues in many of the jurisdictions where we operate and we are generally able to resolve them. In fact, while operating in Mauritania over the last eight years, we have had issues arise. And we've always successfully resolved them. We're hopeful that this will be a similar case as we move forward on discussions with the government and will provide further updates as needed. So to wrap up before opening up the line for questions, again, I'll remind our portfolio of eight mines is delivering solid results. We're in an excellent financial position and we continue to advance all of our development projects. With that, operator, can we please open up the line for Q&A?

[Operator Instructions] Your first question comes from David Haughton of CIBC.

Good morning, Paul and team. Thank you very much for the update. I know that the Tasiast Mauritania situation is very early days, but what's your next step? I know that you've only really received this news in the last day or so. But where do we go from here?

Well, I can't -- that's absolutely correct. It's early days and the letter that we felt we were absolutely obliged to disclose only came in yesterday. We obviously have communications going on with the Minister of Mines and our plan is to seek a way to engage and get into a discussion. There wasn't a lot of clarity in the ask. It was really a pretty general statement about a desire to see an improvement that would come from us. So very early days and not a lot of detail.

So if we're looking at the fiscal regime in Mauritania, it's not that dissimilar to other jurisdictions in Africa with 3% revenue royalty, 25% tax. My estimates show that you’re not actually in a cash tax paying position for at least another five years. Could you consider accelerating that as an example?

Well, yeah, look, I mean we're following the letter of the law as it is for the tax regime in the country. And I think, you're right. There is a similar -- there are similarities to other countries with that kind of tax regime. But look, again, it's early days. I don't want to start negotiating through a public dynamic. I can't get into any detail at this point. It's just come in. We need to sort of get our team together and get back over and talk to the government officials. Tony?

Yeah. I think, David, just to give you a bit of clarity, as you've mentioned, a few things. You're absolutely right. The royalty is 3%. There is a minimum tax of 1.25%, which is on top line revenue. There's also payroll taxes, which differ between whether you're an ex-pat or a national and then there's a value added tax, which is 60%. We also have withholding taxes on services that are coming in from out of the country. Let me put it into perspective in terms of a look back since 2010. We've -- operating cash flow has been negative $72 million approximately. We've paid in taxes, ballpark, including withholding taxes, income taxes that and other amount some of which is recoverable, approximately $400 million during that time period. So there has been a very strong -- there has been -- the government and people at Mauritania have recognized tremendous benefits from our investment there. And if you actually look forward, we looked at sanctioning the project in 2017. We looked at the MPV of the project overall and we anticipated that you would see about $1 billion of fiscal benefits to the country of Mauritania, divided up between income taxes and value of that and customs and other taxes as well and that was predicated on a $1200 gold price obviously with the higher gold price environment, you would see substantially higher revenues flowing to the government. So that gives you a bit of context in terms of where we've been and where we sort of see the project on a go forward basis.

There is plenty of hard numbers there to put to the government and see where you go to from there. So maybe, if I can just move away from that and stay with Tasiast, a very large spend in the first quarter. And obviously that's to complete the phase 1. Were should we be thinking about for the CapEx for the balance of the year? Is it going to taper off from that peak that we had in Q1, but you’re still looking at spending something in the order of 300 plus million dollars overall at Tasiast this year?

Well -- maybe – David, I’ll just take it. So what we're looking at right now is there's a cost to complete phase one and the remaining spend is ballpark $50 million. That really reflects actual cash out the door that we sort of see going for the project itself. Some of that's been accrued, but the actual cash that will go out the door will be about 50. With respect to a phase two, we're probably closer to anticipated spend of $200 million, assuming that there's no impact to schedule or timing of expenditures. So that's how things are sort of laid out for Tasiast and it's really the bigger question is just, as we’re assessing phase two at this point. So, we’ll have some decisions to make, but that's in broad brushes what the capital spend would be, phase one spend will absolutely continue as far as completing that project and then the incremental and phase two will depend on what decisions we make in that regard.

Thank you, Tony. One last question if I may for Lauren. Just the pit wall failure at Fort Knox, relatively minor as you described. Just to put into context, is that on the side of the Gilmore layback or elsewhere in the pit.

Yeah. So, thank you, David. It is in that general area and it's a geotechnically complex area. We've managed this particular area for years and through other phases. So it's well monitored and well managed. The event itself was, I guess, a nonevent really because we had plenty of advance warning that it was coming. So not terribly disruptive from that point of view and again relatively small, not uncommon for this size and depth of pit. It’s inconveniently located in so far as it impacts two phases, because of how it's positioned and so that is going to cause us to have to do a bit of re-sequencing and we're working through those assessments now. I think importantly, with respect to your question, it won't have an effect on our Gilmore project. This is really base case Fort Knox impacts.

Your next question comes from Andrew Kaip of BMO.

Hi. Good morning, gentlemen and congratulations on a stellar quarter. Look, my question is really directed towards Paul Tomory. I'm just curious as to why you are temporarily bypassing the SAG mill. Can you give us some more information on what you're thinking there is and when you're going to integrate that into the circuit?

Yeah. Thanks, Andrew. It’s really seizing on an opportunity. Commissioning has gone very well in the crusher and in the CIL plant and we're able to get through to put rates turn and move upward in those areas. And it also -- what it does is it allows us to really focus on the SAG mill, without being rushed to get it right. And so what we're looking at right now in the SAG mill is completion in June and then commissioning through the summer, while having the comfort of running 12,000 tonnes a day through the bypass circuit. It's not a permanent solution, but it'll suit us fine for quite a long time as we fine tune the SAG.

Okay. So it's really getting that large piece of equipment fine0tuned appropriately and up and running and giving you more time to essentially commission it?

That's right. And as I mentioned earlier, we have run now 10,000, 11,000 and so we're very early here in May. We saw 7, 8 weeks. In throughput terms, we are ahead of the throughput ramp up curve that have been contemplating the study. So like I said, it's really an opportunity we’re seizing up on.

And I guess I would just add Paul, I mean, there is nothing other than routine commissioning process that we're going through.

That's right. Yeah.

Okay. And then -- and just one further question on the SAG at Tasiast. When we were at the site visit last year, there was a discussion just regarding the wall that you're putting in it, because it's oversized for 12,000 tonnes per day. And I'm wondering how, based on your preliminary commissioning, is that -- are you getting the kind of results that you were expecting from reducing the size of the SAG internally?

So yes, we haven't run material through the SAG mill yet. So all of our -- so nothing's changed from the visit. We've done extensive modeling on running the SAG at a finder grind size and we're confident in that modeling and the work we've done that when we do pass material through the SAG, we’ll be able to achieve the throughput rates, but in short, we're going to run the SAG in phase 1 at 250 microns, so very fine. In effect, using it almost at the SAG mill and ball mill and then in phase 2, the intent is to go to 2.5, 3 mill. So it's really about growing size in phase one versus phase two.

Your next question comes from Tanya Jakusconek of Scotiabank.

Good morning, gentleman and congratulations on a strong operating quarter. Just a question for your Tony, you gave us the $1 billion benefits that you mentioned, which is great, at $1200 gold. Can you just put it into perspective what percentage of the total economic benefit would that represent for the government?

Yeah. That's a good question and I mean the number that I gave you is the cumulative cash flow that the government would realize over the life of a project. It’s not apples to apples against the DCF or net present value of the project. So before I give you a percentage, let us come back with that. So we're comparing apples and apples, because it would obviously, you can't take it and divide it against the NPV to come up with.

Yeah. We appreciate it. And just maybe Tony, like, we calculate before VAT and everything, just from operating cash flow, about 20%, but it would be helpful if we would have then the VAT and others to see if we’re in that 20% to 30%, if that’s a normal range, but appreciate the number as well?

Yeah. And we'll be able to come back to you with that percentage, so we're comparing apples and apples. The other source of information that you might want to assess is a technical report, which does give some information but as I said, we’ll chase that down.

We looked at it Tony. Yeah. We just don't have enough to know how much proportion of the VAT? Anyways, we would appreciate that.

Yeah. And I just want to point out that the other major drivers, as I said, is going to be really specific gold price related in terms of the sensitivities to the returns that the government will get

Yeah. No worries. We're happy to look at it at $1200 gold, because you have feasibility study numbers. Yes. So we’ll wait for that number for you, Tony.

Your next question comes from Mike Parkin of National Bank.

Hi, guys. This is more of an accounting question. With your accounts payable, will that -- the completion of phase one, is there a trigger there in terms of pay down of the accounts payable to the contractor or were the change of phase two spending were modified.

Yeah. I think, as I indicated, it's really the impact on payables will likely relate primarily to the phase 1 spend at this point and we have about 40 million left, 48 million left to spend on phase one. As far as phase two, it's really about cumulative commitments that we've made on phase two and those at the present time in terms of specific commitments are in the range of $30 million. Now, depending on what decisions we made on Phase two, there could be some incremental costs that could come into play. So right now, phase two isn’t factoring in payables in a big way and in fact as you would have noted during the quarter, we saw pay down in a reduction in payables, so it impacted our working capital calculation. That's just normal course timing.

Your next question comes from [indiscernible] of Can accord Genuity.

Just wondering do you have a tax stability clause in your agreement in Tasiast? And also if there was a dispute, would international arbitration be a potential outcome?

Well, I’ll just lead off. The answer is, we do have a, we call it, a mining convention, which is akin to a stability agreement. That is a legal agreement with the government that sets out the fiscal terms. We're a long way from all of that at this point. It's early days. Our intention is to get in there and do what we always do, which is have a discussion and we believe there's a mutual beneficial interest here to get this resolved. The government simply requests at a discussion. So I'm not, yes, we do have a convention, yes, there is international arbitration. But we’re a long way from that, where -- this is new news and we're getting there and we’ll have a conversation and see how we go.

Your next question comes from Steven Butler of GMP Securities.

Just on Tasiast Sud, Paul. Paul, they rejected the applications for reasons for failure to meet feasibility criteria. Is there any specifics you can mention there? So on what basis Tasiast Sud was rejected?

Look, again, not really we're in discussions. I think we've been going back and forth with them. We obviously see Tasiast Sud as a satellite that could utilize the infrastructure that we've already got in place, what I would call the Tasiast main event. I think in these discussions over an exploration conversion, this is when this new concept has come onto the table about having us make a proposal on, FS criteria in the discussion that we have had around the conversion has not been explained and is pretty vague at this point. So, we need to continue to dig in.

And then with respect to the pit wall failure that in Alaska you had limiting production there for the rest of the year, is it a matter of your corporate guidance that you'll make up for it elsewhere, anywhere in particular.

Yeah. So Steven, I would say that we won't look beyond the region to compensate for the impacts of Fort Knox. They're not going to be of a magnitude that cause us to really guide in the region.

There are no further questions at this time. I will now return the call to our presenters.

Okay. Well, thank you, Chris and thank you everyone. We’ll be looking forward to communicating more individually in the coming days and weeks. And as many know, we've got our annual general meeting this morning at 10 AM. So we may see some of you over there as well. So thanks, everyone.

This concludes today's conference call. You may now disconnect.