Kinross Gold Corporation (KGC) Q2 2019 Earnings Report, Transcript and Summary

Good morning. My name is Suzanne and I will be your conference operator today. At this time, I would like to welcome everyone to the Kinross Gold Corporation Q2 2019 Results Conference Call and Webcast. All participants are in a listen-only mode 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 all four members of our senior leadership team, namely Paul Rollinson, Andrea Freeborough, Paul Tomory and Geoff Gold. 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 results and performance being different from estimates contained in our forward-looking information, please refer to page 2 of this presentation, our news releases dated July 31, 2019, the MD&A for the period ended June 30, 2019, and our most recently filed AIF, all of which are available on our website. I'll now turn the call over to Paul.

Thanks, Tom and thank everyone for joining us today. As you will have seen in our news releases last night, in addition to our second quarter results, we announced an agreement to purchase a high quality development project in the Far East of Russia, complementing the excellent business that we have had for many years in that region. I'm excited to share with you the details of this transaction at the end of our remarks. But first, we will be providing an overview of our second quarter results. So turning now to the results, I'm pleased to say that, with strong production and excellent cost performance across our portfolio during the first half of the year, we are on track to meet our 2019 guidance targets for production, costs and capital expenditures. Paul Tomory will have more details on our operations and projects. But I would like to highlight the continued strong performance of our three largest operations: Paracatu, Kupol and Tasiast, which also delivered the lowest costs in our portfolio. Together, in the first six months of the year they produced over 60% of our total ounces at an average cost of sales of just over $600 per ounce. Paracatu achieved particularly impressive results, marking the third consecutive quarter of record production and the fifth consecutive quarter of declining costs. The combined Kupol-Dvoinoye operation maintained its long track record of consistent high performance. And at Tasiast throughput continues to average well above expectations and costs continue to trend lower, making this the third consecutive quarter Tasiast has reduced its costs. In short, Tasiast is making great progress to becoming a large low-cost producer. Also at Tasiast, we are continuing to advance our evaluation of lower capital alternatives for increasing throughput. We continue to believe that the outperformance of the mill has created the opportunity to increase throughput to above 20,000 tonnes per day, while achieving substantial capital savings and enhanced economics. We look forward to completing this work and plan to share the results with you in mid-September. At the same time, we continue to make progress in advancing the Tasiast project financing with the IFC EDC and two commercial banks and continue to target completion later this year. Andrea will have further details for you in a moment. And as many of you are aware the Presidential election occurred in Mauritania near the end of June. We do plan to engage with the new government following the President's imminent inauguration and the subsequent establishment of a new cabinet later in August. So turning to our development projects where we continue to make good progress. Over the past two years, we have been leveraging our financial strength to reinvest in our business and have steadily progressed our pipeline of opportunities. Our two projects in Nevada Phase W and Vantage, are progressing well and both achieved a significant milestone during the quarter. In late May, Phase W poured first gold from the project, which was then followed by the first gold pour for Vantage at the end of June. At the Gilmore project heap leach construction is advancing well and we are on track to begin stripping in the third quarter. And finally, we are also making progress advancing the next set of opportunities to add to our pipeline, specifically our projects in Chile. We completed the Lobo-Marte scoping study earlier this year with promising results and remain on track to complete the La Coipa feasibility study in the third quarter. To wrap-up our mines generated strong results in the first half of the year positioning us well for the balance of 2019. We are on track to meet our full year guidance and we are making good progress in advancing our development pipeline. I'll now turn the call over to Andrea for a review of our financial results.

Thanks, Paul. I'll begin with a few financial highlights from the quarter. Increased production and improved cost performance combined to deliver strong financial results in the second quarter. Our global portfolio produced approximately 648,000 ounces with an average cost of sales of $663 per ounce and an all-in sustaining cost of $925 per ounce. We sold 12,000 fewer ounces than we produced in the quarter largely due to the timing of sales at Bald Mountain. We generated approximately $288 million in adjusted operating cash flow, which is a $56 million increase over the same period last year. This is largely due to higher margins as our attributable margin per ounce sold increased by approximately 20% compared to the same period last year. During the quarter, we realized an average gold price of $1,307 per ounce, which is in line with the same period last year. Prevailing gold prices and other key commodity and currency rates have performed favorably compared to our budget assumptions for the year. We also continue to look for opportunities to lock in favorable FX rates and other inputs with our hedging program, which positions us well in the current environment. Adjusted net earnings were $80 million for the quarter or $0.06 per share compared with $38 million or $0.03 per share for the second quarter of 2018. Net earnings were $72 million compared with $2.4 million in Q2 of last year. The increase was primarily the result of higher operating earnings, partially offset by an increase in income tax expense. Continuing with tax, we received a $66 million AMT refund in Q2 resulting from the 2017 U.S. tax reform legislation. We expect to receive subsequent refunds in decreasing amounts over the next three years. Turning to our outlook for the remainder of the year, we are on track to deliver on our 2019 guidance, for production cost of sales all-in sustaining costs and capital. We have made one minor guidance adjustment. DD&A for the first half of the year of approximately $276 per ounce was below our full year guidance of $330 per ounce largely due to production mix. As a result, we have reduced our DD&A guidance to $300 per ounce for 2019. I would also like to note a few seasonal items that we expect to impact cash flow in the third quarter. The second of our semiannual interest payments increased working capital related to our supplies purchasing campaign in Russia and an increase in capital expenditures in particular sustaining capital which is expected to peak in the third quarter. In addition to our financial results, I'd like to highlight two financing items that we progressed during the quarter namely the Tasiast project financing and the extension of our revolving credit facility. First, as Paul noted, we've continued to advance the $300 million project financing that we're targeting for Tasiast with participation from the IFC, EDC and two commercial banks. We continue to target completion later this year with final due diligence activities advancing well and work now focused on completing the details of the loan documentation. Second in July we extended the maturity date of our $1.5 billion revolving credit facility by one year to 2024. Looking at our balance sheet. We continue to maintain a strong liquidity position with available liquidity of $1.9 billion and no debt maturities until 2021. We have the financial flexibility to invest in our capital priorities as we complete our current cycle of development projects. I'll now turn the call over to Paul Tomory for a review of our operations and development projects.

Thanks, Andrea. I'll be walking you through some of the key highlights of our global portfolio touching on both operating performance and project updates. I'll start with Paracatu, which as Tom noted had a particularly impressive second quarter. Production increased by almost 40,000 ounces compared to the first quarter, while cost declined by $75 an ounce. On our last call I outlined several factors that are driving Paracatu's strong performance and these include results of the asset optimization work which we completed last year benefiting throughput and recovery; continuous improvement efforts; and enhancements made to mine infrastructure most notably in the power plant. In addition to these measures which continue to contribute to strong performance, Paracatu has also benefited from strong grades this past quarter as we were mining in the high-grade portion of the ore body as had been anticipated in the mine plan. As I've stated in the past there is some variability in the ore of Paracatu and in July mining transition to a lower grade phase of the pit. Overall, we are extremely pleased with Paracatu's performance and expect 2019 to be a strong year for the operation. Turning to Tasiast. Throughput continues to outperform our original expectations. The combination of higher than anticipated mill throughput and recovery resulted in approximately 93,000 ounces of production. This is slightly lower than Q1 largely due to planned lower grades which we expect to improve for the balance of the year. We're also making good progress on the cost side, decreasing by $4 an ounce compared to Q1 largely as a result of a focus on operating efficiencies and also lower operating waste mined. Our project team is making great progress on the study of throughput alternatives in order to assess the most capital-efficient next step for Tasiast and we are targeting sharing the results in mid-September. Moving on to our mines in Russia. Kupol and Dvoinoye continue to be consistent low-cost producers with cost of sales decreasing in the second quarter by $36 per ounce compared to the previous quarter. Production at Dvoinoye Zone one began in the second quarter as planned. We continue to prioritize exploration activities at our Russian mines. At Dvoinoye for example, our efforts in the first half were focused on Zone 37 West and the results to date have been encouraging. At Kupol, our work has been focused in a few different high potential areas including the Kupol main and hanging wall zone where results continue to be positive; Big Bend area where drilling has continued to intercept significant grade; and at the North Extension where we are seeing grades higher than previously modeled. We plan to continue to test targets at both Kupol and Dvoinoye in the second half with the goal of adding to the operation's estimated mineral reserves and resources with our year end results. Turning now to our mines in Nevada. Round Mountain performed well during the second quarter as production improved due to an increase in heap leach ounces partially offset by lower mill grades. Costs were largely in line with the first quarter. We are making excellent progress with Phase W. We began commissioning of the processing circuit ahead of schedule in the first quarter and the vertical carbon-in-column plant is now complete and operational and as Paul mentioned we've poured our first gold from Phase W in late May. Mine infrastructure including the truck shop warehouse wash bay and fuel island are approximately 95% complete and expect it to be fully commissioned in the third quarter. Stripping is running slightly ahead of schedule and budget and we have encountered initial ore in portions of the Phase W footprint and stripping is expected to continue into late 2020 as per the project feasibility study plan. The Vantage project at Bald Mountain is also well-advanced. We began commissioning of the processing circuit as planned in the first quarter; the VCIC plant and heap leach pad are now substantially complete and in production; and the project achieved its first gold pour in late June. Construction of supporting infrastructure truck shop warehouse and wash bay are also close to completion. In terms of Bald's quarterly performance, Q2 production was lower quarter-over-quarter largely due to the effect of less ore placed on the pads and a decrease in mining activities. The site experienced unusually severe weather during the first half of the year, April and May in particular which challenged both Bald's operational performance and construction of the Vantage project. While the ramp-up has been slower than anticipated and is expected to impact Bald's production and costs for the year, we expect mining activities and quarterly production to improve in the second half. On the exploration front at Bald work in the first half of the year returned promising results at Redbird including high grade intercepts adjacent to the current Redbird resource shell. In the second half, we plan further work including testing the high-grade mineralization along the northeast trend and southeast expansion. Moving on to our Fort Knox mine in Alaska, performance improved as planned in the second quarter with better production and costs compared with Q1. However weather-related conditions impacted geotechnical stability in the northwest section in the second quarter and as a result we've had to do some additional step-out mining and expect some deferral of production. However, neither the life-of-mine production or the Gilmore project have been impacted with the latter proceeding on budget and on schedule. Construction of new heap leach pad is underway and we've made great progress laying the impermeable liner. Dewatering for the pit layback is proceeding according to plan. We are on schedule to commence stripping in the third quarter and now expect to encounter initial Gilmore ore later this year approximately one quarter ahead of plan. Finally to turn to our projects in Chile as Paul mentioned, we are on track to complete the La Coipa FS in the third quarter. Following encouraging scoping study results for Lobo-Marte we've advanced the project to PFS which should be expected to complete in mid-2020. Both studies are assessing the degree to which resources such as personnel water energy and capital equipment can be shared and leveraged for synergies and efficiencies between the two potential projects. To wrap up, our priorities continue to be maintaining our excellent safety record; delivering strong consistent operating results; managing our costs; and delivering our projects on time and on budget. And with that I'll turn it back to Paul.

Thanks Paul. I'm now pleased to share with you the details of our agreement to acquire 100% of the Chulbatkan development project. The transaction involves total consideration of $283 million over two years comprised of 40% cash and 60% shares. Upside payments in the form of a 1.5% royalty and a $50 per ounce payment for potential reserve additions beyond 3.25 million ounces of 2P are also included in the consideration and highlight the expectation from both parties that this asset has the potential for substantial growth. This is a really exciting opportunity where we have spent the past 16 months completing a significant amount of due-diligence including several site visits, an eight hole confirmatory drill program and a met testing program that confirmed favorable characteristics and recoveries. And I'd point out that throughout our drilling and met testing programs we maintained a strict chain of custody to ensure sample validity during the due-diligence process. We see four strategic reasons why this is the right acquisition for Kinross. First, this is a high quality development project with strong upside potential. Chulbatkan has a large resource estimate of approximately 4 million ounces and has a relatively high grade, near surface, low strip open pit, heap leachable deposit. The project already has the potential to be a substantial producer with an attractive cost structure. Based on our initial work, we estimate that Chulbatkan could produce 1.8 million ounces over a 6-year mine life with first quartile all-in sustaining costs in the $550 per ounce range. In addition there is significant upside potential beyond the 4 million ounce resource estimate as the deposit is highly continuous and is open along strike and at depth. There are also multiple untested high quality targets within the 120 square kilometer exploration license. Second, this project leverages our experience as a world-class operator of open pit cold climate heap leaches. Third it builds on our existing regional platform as Chulbatkan is expected to enhance longer-term production and cash flow in Russia. We have a long history of operating successfully in the country having owned and operated four mines over the past 24 years. And with that comes a well-established team in the region a robust network of suppliers in the country and strong relationships with several Russian stakeholders. Additionally Khabarovsk where the project is located is a mining friendly jurisdiction and the fourth largest gold producing region in Russia. Our business in Russia is run out of our Magadan office, which is located roughly equidistant between our existing operations and this new development project. And lastly, the project is well aligned with our project pipeline and capital priorities. We plan to undertake an extensive drilling program with the goal of further increasing the resource estimates with a view to completing prefeas and feasibility studies within the next three years. We are targeting a two-year construction period with a current estimate of initial capital expenditures of approximately $500 million. Overall, we believe this opportunity is an excellent fit for Kinross and we are pleased to be adding a high-quality project to our development pipeline. Turning back to our performance for the first half of the year to wrap up. Our portfolio of eight operations are performing well. We remain in a strong financial position and our project and development pipeline is advancing well. With that operator, can we please open up the line for questions? Thank you.

Operator: Thank you very much. [Operator Instructions] Okay. And our first question comes from the line of Stephen Walker of RBC Capital Markets. Go ahead. Your line is open.

Great. Thank you very much. Paul, just a question on Chulbatkan. I guess two parts. The first part is the Subsurface Mineral Act. Do you need permission from the resource ministry to own 100%, or does that come automatically with the transaction? And then secondly, can you talk a little bit about the infrastructure road access river access, access from existing operations just a bit more on the infrastructure?

Sure. Thank you, Steven. Good question. We did have some disclosure around that subsurface and what we think might be required in terms of approvals. But maybe I'll give Geoff an opportunity to respond.

Thanks, Paul. Yeah. Steven look maybe just a little bit of context. Basically, under a literal interpretation of the law strategic approval for the project is not required, because the current registered resource with the authorities of one million ounces does not exceed the strategic 50 tonne threshold. However, you would have seen in our press release and as Paul has alluded to that we do have our own estimate of 3.9 million ounces that does exceed the threshold. As a result, what we're doing is seeking guidance from the authorities on whether strategic approval is required. If it is, we would make the filing and would expect to receive that approval in six to eight months. Just for context we have successfully filed two applications in the past and we're pretty comfortable with this one and we plan on maintaining our good relationships with the authorities.

Great. Thanks Geoff and Paul maybe you can speak a little bit to infrastructure access.

Right. The area as Paul mentioned earlier has a good base of mining in the general area of Khabarovsk and the two nearest major cities -- Khabarovsk obviously is the state capital. And then closer to the site is a city called Komsomolsk-on-Amur. Both of them are significant sized industrial bases. The site is accessed with all-season road that gets us most of the way there and then beyond that there are seasonal and logging roads that access the site. Part of the project will be upgrading that infrastructure. But very beneficially to a potential project there, the site is immediately adjacent to a significant river and is accessible by barge. So on a relative basis this site is significantly more accessible than say Kupol is.

Thank you, Paul. Paul Rollinson maybe just stepping back and -- you spoke a little bit about Tasiast earlier and post the election with a new President and the senior ministers that are in place in Mauritania. Can you talk a little bit about how you expect the process to unfold here in the discussions with the government and reestablishing dialog with the government? To date, do you think it's a situation where it will be sort of an amicable sort of discussion on what the future taxes could be, or do you think it's a case of, how do I put it, chicken where you're going to see who flinches first when it comes to making concessions? Do you think that there is room for amicable negotiations here on some of the issues that were brought up by the previous administration?

Yeah. Look -- thanks Steven. Again good question, just real-time, the inauguration of the President is actually happening today. It may well be over by now, so just inaugurated. Next steps will be formation of a cabinet. I expect that'll take a couple of weeks. And as we understand there is a desire to sit down and -- on both sides and meet the new administration. So, I would say, we're feeling very good. The electoral process was very smooth. International commentators have come out with a, sort of, favorable commentary on the entire process, and during the election campaign this particular individual was very pro-business and pro foreign investment. So, yeah, look we're feeling very good about re-engaging with this new administration. The issues, again let me remind you, are not significant. They're typical of what we'd expect in many countries. A lot of it relates to supply chain and procurement and that sort of thing. And as you have seen, the site itself has continued to just do exceedingly well, third quarter, fourth quarter, first quarter, so certainly our discussions with the previous administration and the discussions we hope to have with this new administration have not in any way impacted -- project has done exceedingly well. I guess the last thing just on a note of kind of goodwill, we of course, were invited to the inauguration today, and we did have several members of our team at the inauguration. So we're feeling pretty good about how things have evolved there.

Thanks for that Paul. And again, one last question, and I apologize for taking up so much of the Q&A. But capital allocation with now Chulbatkan, as a potential project, La Coipa basically in hand, feasibility at Lobo, pre-feasibility, the Tasiast expansion, other organic projects, how are you thinking about capital allocation over the next three to four years? What should we think about and investors think about how you're going to be spending that capital as it stands at the moment?

Sure. And again another good question. Well in the near term and the medium term the priority again will be Tasiast and La Coipa. As we've said, we're going to come out with our revised optimized thinking in mid-September for Tasiast, and again, we've said, we'll come out with the completed feas results on La Coipa later this fall. So those are the near-term priorities. I think though, as we look out to the medium term, there will be -- and that's the way we set things up here. There'll be -- not to say we can't do both, but Lobo-Marte and Chulbatkan may well compete for capital and we'll be completing studies on both of them around the same time. So Chulbatkan it'll be in the next wave behind La Coipa and what we intend to do at Tasiast.

Thank you very much Paul.

Thanks, Stephen.

Thank you very much. And our next question comes from the line of Steven Butler from GMP Securities. Your line is open.

Good. Thanks operator. Good morning guys. Well, question for you guys on the recovery assumptions that you've generated for Chulbatkan. It was quite clear in the release, unless I missed it, but what's the indicated recovery on the work that you've done to-date on the heap leach?

Look again Steve I'll hand off to Mr. T. here, but -- I think 16 months of work lots of due diligence, but I think our starting assumption is relatively conservative. But Paul, do you want to maybe comment a bit more on what we used?

Right. So for the numbers in the press release on the life-of-mine production, we based that on a three-stage crush getting to 60% recovery which is at the conservative end of what we think we might be able to get to. But we want to get through the next round of studies before we potentially increase that number. But the number is 60%.

Is there a sulphidic component to it Paul? It strikes me, but that’s great that the recovery would like to be a bit higher, but anyway?

It's not unusual for heap leaches that kind of margin that we are running in the mid-60s. Tasiast gold bleach was around 50%. So this is a pretty clean leaching oxide. And as I said there is potential to improve that more test work. We just want to be conservative in our initial estimates.

And guys, the resource you talked about being open along strike at depth is it -- I mean that is the case? I mean the drilling sort of defined over such a straight-line 3.9 million indicated ounces and it's just a matter of where the drills start turning? Is that the idea?

Well and that's -- one of the most exciting things about this project is that on the one hand the base case alone is a very attractive project, the heap leach the numbers we've put out there. But most of the holes terminate in grade and it is truly an open deposit and we are already building the exploration program for next year and it will have a very significant component of drilling at Chulbatkan. So it is very prospective and very exciting.

Okay. Thanks guys.

Thanks Steve.

[Operator Instructions] Our next question comes from the line of Grant McAdam of Economical Insurance. Please go ahead. Your line is open.

Hi. Can we assume that Kupol won't go past 2025, or is there a scenario where you can run both? Thanks.

Absolutely do not assume it can't run past. We've had a great success of finding ounces through the course of the year and that goes back several years. It is an underground operation and there is a limit to how far we can get ahead of the curve. But I do like to remind people that when that asset came into our company the mine life was 2017. And if you look in the rearview mirror each year we've had very good success in continuing to find ounces as we're mining throughout the course of the year. And I see no issues in our ability to continue to run or have both operations running together.

Yeah. We have a -- you'll see in AIF recurring mine like in 2023, but we've been adding reserves every year for the past several years and we have a very strong optimism in our ability to continue that track record of adding to mine life at Kupol.

And I would say, we actually increased our exploration budget for this year and we wouldn't obviously be doing that if we didn't see the potential to keep going.

Okay. Our next question comes from the line of Tanya Jakusconek of Scotiabank. Your line is open.

Hi. Good morning everybody. Maybe for Paul T. just the studies that you're going to be doing on this project for the next few years, how much is that going to cost?

So we've looked at a comprehensive program that includes a pre-feasibility study followed by feasibility study as well as a pretty substantial drilling program, so all-in the range of cost for that will be $30 million to $40 million over the next three years.

Okay. And then including that plus what you've paid for what is your internal rate of return on that at a $1200 gold price?

We don't get into that. I mean we've got a whole range of sensitivities and I would say we're comfortably double digits.

Okay. We are a bit lower than that. But okay. Thank you.

Thank you. And our next question comes from the line of Mike Parkin of National Bank. Please go ahead. Your line is open.

Hi guys. Just following up on the acquisition. With regards to the permits, is there anything outstanding that you need? It seems like it's already got some in hand. And then on drilling, when is the earliest that you could expect to start putting drills to work there?

Geoff, do you want to take the permit question?

Yeah. Yes. We've got -- we're permitted well into the future on both exploration and trial mining.

Okay.

2037 is the….

Is the exact date, yeah. Okay.

And then with respect to the drilling program, we've -- as Paul indicated we've done 16 months of work on this asset, which included some confirmatory drill holes and we've been working over that time period with the seller and we continue to work with them planning the drill program. We anticipate having a substantial component in our exploration budget for 2020.

Okay. And is it something -- doesn't look like a region that's restrictive on a seasonal basis. Is it kind of a year-round drilling area?

There will be a seasonal component but it won't be as restrictive as what we currently experience at Kupol and Dvoinoye.

Okay. And could you just remind us in terms of taxes like how the taxes will kind of flow for that project? You get a bit of a tax holiday initially?

Yeah. Mike, it's Geoff Gold. Maybe I'll just explain that a little bit because it requires a little bit of context. Effectively, the project is a registered participant in something called the regional incentive plan and the regional incentive plans are part and parcel of an overall federal initiative to encourage investment and development in the Far East basically. And this plan provides for a range of reduced tax rates, including corporate property and extraction taxes for a period of up to 10 years. And based on the laws as we understand them today and some preliminary discussions with the authorities we believe these incentives will continue and we're in the process of confirming that with the authorities once we're in a position to discuss with them the more specific investment parameters of the project.

Great. All right. That's it for me guys. Thanks so much and congrats on the solid quarter too.

Thank you.

Thank you very much. [Operator Instructions] I don't see any more questions in the queue. I'll turn the call back to the presenters for any closing remarks.

Great. Thank you, Suzanne. Thanks everyone for joining us today and we look forward to catching up with you in person in the coming weeks about our business and this really exciting opportunity. Thanks very much.

And this concludes today's conference call. You may now disconnect.