Centamin Egypt Management Discusses Q1 2013 Results (North American Analysts) - Earnings Call Transcript

May.16.13 | About: Centamin PLC (CELTF)

Centamin Egypt Limited (OTCPK:CELTF) Q1 2013 Earnings Call May 15, 2013 9:00 AM ET

Executives

Andy Davidson – Head of Business Development and IR

Andrew Pardey – COO

Pierre Louw – CFO

Analysts

David Haughton – BMO Capital Markets

Toby Peregrine-Jones – Wells Fargo

George Topping – Stifel Nicolaus

Operator

Thank you for standing by, and welcome to the Centamin Quarter One Results Call. At this time, all participants are in a listen-only mode. There will be a question-and-answer session. (Operator Instructions) I’d like to hand the conference over initially to Andy Davidson. Please go ahead.

Andy Davidson

Thanks, Rica. Hello everyone. Thanks for joining us. I am joined with – I am joined by Andrew Pardey, COO, and Pierre Louw, CFO. And I think as per normal form with these updates, we just go straight into a Q&A session. So, I’d just like to throw the line open for questions as we have got many. Thanks.

Question-and-Answer Session

Operator

Wonderful. (Operator Instructions) Your first question comes from David Haughton. Please ask your question.

David Haughton – BMO Capital Markets

Yes, good morning, Andy. Hope things are well over there. I got a question for you in relation to the fuel oil subsidy, and I am just looking for a couple of clarifications here, firstly, that the cash cost of 556 for the quarter is inclusive of tying full price for fuel?

Andrew Pardey

That’s correct, David. Yeah, we since Q4 in the annual results, we are now expensing the prepayments. Sorry, we are treating them as an exceptional item on the P&L.

David Haughton – BMO Capital Markets

And the $700 million per ounce guidance excludes that subsidy as well in the same basis?

Andrew Pardey

In the same basis yeah, we report everything now on the full international fuel price basis in terms of guidance and at unit costs.

David Haughton – BMO Capital Markets

Okay. And previously we had been – you had given a heads up about the $8 million prepayment. And just tracing it through, I saw that you’ve got a balance sheet item for the prepayment and assume the cash flow, but it’s not reflective at this stage through the P&L. Is that the way that we should think about it and is it just a one-off or should we think about some more of these going forward?

Andrew Pardey

The advance made to EMRA is against future profit share that becomes payable down the line. When profit share kicks in officially, obviously, it’s dependent on the gold price to a certain extent. It will go through the P&L at that time. Until then these advances are on the balance sheet reflective of future expense. So, your question in terms of whether we are likely to make any more of these payments, I would say yes, our current modeling say spending on gold price, $1,600 gold price. When we looked at them, it looked as though profit share would become officially available in 2014 next year. Obviously, if it’s a lower gold price environment, that would push that to the right. So, we do expect to be making additional advances up until the point whenever profit shares comes payable formally. So, hoping we probably should expect another payment around about mid-year, at the mid-year, and then maybe the same time again next year – early next year.

David Haughton – BMO Capital Markets

Alright. And by 2014, you are talking about the fiscal year 2014 on your modeling or calendar ‘14?

Andrew Pardey

Yes, the fiscal year is the way the operating company works here unchanged.

David Haughton – BMO Capital Markets

So, based on your modeling 1,600 it looks like you would be tying that full participation, well the 60% ownership to you, 40% to the government by June of next year, that’s your current modeling.

Andrew Pardey

Correct.

David Haughton – BMO Capital Markets

Okay. Now, the way that we would have expected the payments once you trigger that to you as the 60%, then 55%, then 50%-50%. I would have expected it to have come out as a minority interest in your P&L and as a dividend in your cash flows statement, so is it the way that you are looking at it too?

Andrew Pardey

I think I will let Pierre answer that.

David Haughton – BMO Capital Markets

Yep, okay.

Pierre Louw

Yeah and I think if you just look at the accounting treatment we treat the joint venture – as a joint venture with and fully consolidated to the account. And then the portion that we do play over what we treat it as a quasi tax or similar to quasi tax. So, we will bring 100% of the costs in and then we will have a line where we actually removed the profit share to the government as it is a tax payable.

David Haughton – BMO Capital Markets

Okay, as a list minority and you would treat the payment to the government as the dividend?

Pierre Louw

I think we’ll probably treat it and we haven’t got finalization on this we – I will say discussion we’ve got ongoing at the moment with our auditors. We will probably treat it as about – before earnings per share, just about earnings per share? That’s probably where it’s going to go, but it’s not final yet we have that discussion ongoing at the moment.

David Haughton – BMO Capital Markets

Already and Pierre well I’ve got I noticed that you’ve got a loss of associative nearly $1.5 million. What’s the associate that’s in relation to in your P&L?

Pierre Louw

That’s the shares, basically share valuation that we have got in some of our companies like Nyota for instance where we invest and where the share prices have come down. So, we have taken a knock on the value there.

David Haughton – BMO Capital Markets

Okay, alright, because it’s treated as a – I would have expected it as something like an abnormal item of any payment value of carrying value rather than loss on associate for instance?

Pierre Louw

Yeah, it is share transactions and it is losses on the value of shares.

David Haughton – BMO Capital Markets

Alright and the last question from me on the 19th of June you’ve got a hearing coming up. Is this just a hearing for going through paper work or would you expect to have some decision made by the court in relation to that 3 kilometers versus the 160 square kilometer item?

Andrew Pardey

It’s very unlikely we’ll get a decision on the 19th of June. Our understanding is it’s going to mark the first hearing most likely out of the number of hearings in the process whereby the Supreme Court – Supreme Administrative Court which is our – the appeal court that’s hearing the case. Then that process commences on 19th of June whereby they hear the merits of the appeal or they’ll consider the merits of the appeal. So, that really marks the start of the appeal process is proper. And we had the last meaningful outcome from the appeal process was back on the 20th of March where that same panel of judges, the seven judges who will sit on that panel of Supreme Court wrote to (suspend) the judgment. There is no judgment by the administrative court pending the outcome of the appeal. So, that cleared the way down for the merits of the appeal hearings to commence and 19th of June is the first of those hearings.

David Haughton – BMO Capital Markets

Okay, so to the best your knowledge is just an administrative step one of many to come?

Andrew Pardey

Yeah, I guess the follow-on question, the natural follow-on questions how long is this process is likely to be and we are suggesting that it will carry on through the course of this year. So, we’ll certainly make best efforts to try and resolve the appeal as quickly as we can but we can’t give any clear stay or guidance court promises or otherwise in relation to that to the best of our knowledge is kind of go through the remainder of this year.

David Haughton – BMO Capital Markets

Okay and that non-binding recommendation that had been made by the Egyptian State Commissioner’s Office. How much white do you think that carries because I know you’ve made the statement that it doesn’t appear to address the substantive merits of the appeal, so what’s your – how important is that recommendation?

Andrew Pardey

It’s a recommendation that is not binding as we said in the release, there is no obligation by the Supreme Court to hear to that recommendation. It’s made two individuals who are not connected to the panel of judges that sit on the Supreme Court. So, it’s one of the number of documents, of course, most importantly from our perspective, of course, are package of documents in relation – as submissions in relation to the appeal and EMRA’s Minister of Petroleum, all these submissions are made into the court, and this is another one of those submissions that go into the Supreme Court, so its advisory and its content.

David Haughton – BMO Capital Markets

Provided the non-binding recommendation prior to going into the Administrative Court back in October?

Andrew Pardey

It’s part of the same office, yes.

David Haughton – BMO Capital Markets

Okay. So, in that instant, it was overruled by the Administrative Court, so because that does demonstrate it is non-binding then?

Andrew Pardey

Correct. And there are plenty of other (indiscernible) outside of our case that demonstrate the same principle.

David Haughton – BMO Capital Markets

Okay, thank you very much.

Andrew Pardey

Thanks, David. Cheers.

Operator

Your next question comes from (indiscernible). Please ask your question.

Unidentified Analyst

Hello, with regards to your stage for expansion, can you run through some of the last items to be commissioned on specifically what you expect to have online in early 2014?

Pierre Louw

Well, basically I mean I can let Andrew elaborate on this, but plant will be operational before the end of the year, the expanded plant, so we will be through the commissioning process in second half of this year.

Unidentified Analyst

Okay. And then just with regards to the crusher, I think that’s supposed to come online last, and I guess what we are trying to get at is whether the old crusher would be able to accommodate any of the larger throughput before the new one is ramped up?

Pierre Louw

Andrew, would you like to carry on with that?

Andrew Pardey

Yes, the old crusher will initially be able to as we are ramping up states, so the old crusher will be out of – provide the seed for the commissioning phase and initial ramp up of stage four.

Unidentified Analyst

Okay, thank you.

Andrew Pardey

Thank you.

Operator

Your next question comes from (indiscernible). Please ask your question.

Unidentified Analyst

Hello Andy, Andrew and Pierre. A couple of questions in operations, first just on the underground just relate to the press release here, there is equipment availability issues, but how would you describe things underground just between your managers and getting the right employees, getting the right skills, and your confidence level in building this out of the next year or so?

Andrew Pardey

Dan, it’s progressing well. While we had issues, they weren’t major issues, but we did highlight them. And we have also made the decisions, well, we had the fourth truck, but one of those trucks is the old 769. We have decided we are not going to use that truck anymore, and we have got a fourth truck that will be onsite in July. So, we will have two brand new trucks in the underground and we’ll have two trucks that haven’t even got to their business life. So, we will have four good bits of equipment holding out of the declines.

Unidentified Analyst

And just in terms of the skills and development of skills underground etcetera and I forget the name of your manger from Australia, he is still there and just in terms of…

Andrew Pardey

Yes, our underground manager is still there. The same contract manager is still there. The key people are also part of the underground team.

Unidentified Analyst

Okay. And so your confidence in building this up is if anything getting stronger?

Andrew Pardey

That is correct, Dan. As I have said this morning as well, we now have now Ptah. We have a development crew that’s totally dedicated to Ptah. Ptah is now a separate operation from Amun. With far enough down, we have independent ventilation. We have independent firing down there. So, we don’t have to clear when we are firing Ptah. We don’t have to clear Amun and vice-versa. We have also started the first cross cut in Ptah going across to the pull free in that northern end.

Unidentified Analyst

Okay good. Just onsite you have had the issues over the last couple of years with the strikes etcetera, and it sounds like things are as good as they have been in the last couple of years, is that an accurate statement?

Andrew Pardey

Dan, I have just come from site, and I was walking around the different areas and talking to people and the general feedback I got from everyone was very positive by its Egyptian employees and expatriate employees, no one was coming up to me and complaining about this and complaining about that, everyone was very positive.

Unidentified Analyst

Yes, thank you. Andy, just on the court case, the recommendation, nice work Andrew and is talking about this, I just wonder if it’s possible if we don’t have it now to try to get a list of or some kind of historical data of what’s happened when we have recommendations like this? And how often the court has followed those recommendations, I know this is a kind of unique case, but it is – that’s the best way we can probably get comfort with this if it’s on a lot of occasions sees things are in order, then the court goes the other way. That’s one request. The second part of it is just who are these two guys, when you read this thing who are the two individuals who wrote this recommendation?

Andrew Pardey

I think it takes a lot of time and effort from our lawyers to compile a list of sort of other litigations and go into sort of things and answer about the other cases. So, I think we are all pretty focused on our case. So, I mean, there are Presidents pretty significant ones, and maybe I will be able to elaborate more on that as I get more information over time, but really the key thing here is an advisory report. There is no obligation for the court to follow the recommendation. The individuals that wrote this report, whether as I said before they are unconnected to the actual decision-making process and not part of the panel as the Supreme Court themselves. The report when you read it is very flurry, yes, it’s very rhetorical, it’s longwinded. It doesn’t contain any real legal arguments, nothing cohesive in there that we can really concern ourselves about. There is nothing in there that we don’t address, that’s already in terms of our appeal, haven’t talked about in court in our submissions before. There is no need for us. We are very confident we don’t need to deteriorate our appeal basis or spend too much time worrying about the consensus is baseless in our view and contain no real legal argument.

I think we have been pretty clear before certainly in our conversations and most conversations I have had with people and presentations we have made, there is an element within the judiciary to this political affection within the judiciary that have an agenda. It’s more political rather than concerned with the process of law. However, and this is clearly another manifestation of that this report, but the most important thing from our point of view as we go back to the 20th of March and ruling was made on the 20th of March very clear. The court found and they stated categorically that the exploitation lease was valid, and there is a very likely probability that we would win the appeal on the basis of that evidence. So, that in our view is the clearest and most overwhelming indication as where the court stands at the moment. And we’ve got no expectation, no reason to believe that they will change their view from that certainly based on this rhetorical document that’s just being submitted.

Unidentified Analyst

Andy, that’s helpful. But these recommendations, a bit of a mystery to us, and it was bit of a mystery to you too, are these judges come out with this, are they in Cairo, are they – and how often is this part of the procedure in such case?

Andrew Pardey

They are judges and they are involved in the judiciary. They do hold that status as judges, but they are not judges in decision-making capability. They don’t hold them any decision-making authority in the row as commissioners. And so, yes, they hold that nominal status, but they are not judges and they are certainly not involved in the decision-making capabilities obviously with us.

Unidentified Analyst

Okay. Where are they based and is this a normal practice?

Andrew Pardey

Where are they based? I believe they are based in Cairo.

Unidentified Analyst

Okay. And just normal that we have a recommendation like this, in our litigations you said this is?

Andrew Pardey

It’s a normal procedure then to have this and we saw this obviously early on in our core processes. This happened – there is an advisory panel. I think maybe we talk more offline on this thing, if we go into more detail, I think we have said really, or that we want to say now on this aspect on the court case. I think it’s a distraction from our point of view this report. It’s not anything that alters our appeal as I said before. And I think the real material event was the 20th of March, but I am happy we can talk more offline if you like.

Unidentified Analyst

Okay, thanks Andy.

Andrew Pardey

Thanks, Dan.

Operator

(Operator Instructions) Your next question comes from Toby Peregrine-Jones. Please ask your question.

Toby Peregrine-Jones – Wells Fargo

Hi there. Could you give us some color on the extent to which you are proactive in managing your relationships with the Egyptian government and managing the company’s profile?

Andrew Pardey

Well, we are not political as a company, we never have been. We don’t – yes, what’s the word, lobby or use relationships within government to our own advantage and never have done. And certainly, if we would have done that over the course of when we are developing the mind, we would be in real trouble now. So, as a general policy that we are very political, we stick to the terms of our concession agreement and the operating parameters are set for us and we abide by that, and we always have done royalties. So, we don’t manage anything politically. We at our relations with our government partner, EMRA, on a day-to-day the basis and those relations are good.

Toby Peregrine-Jones – Wells Fargo

That’s very helpful. Thank you.

Andrew Pardey

Thank you.

Operator

Your next question comes from George Topping. Please ask your question.

George Topping – Stifel Nicolaus

Great, thanks and hello everyone. So, can you confirm that you are able to repatriate any profits from the mine while this court case is ongoing?

Andrew Pardey

Yeah. There is no restriction in regard to the court case, and the terms of the concession agreement are very clear on that matter, and we have full ability to repatriate funds.

George Topping – Stifel Nicolaus

Okay, good. Then just on the underground cost, can you tell me that as part of the budget, how much are you capitalizing for this year in millions of dollars?

Andrew Pardey

Yeah, the budget is $18 million for the year.

George Topping – Stifel Nicolaus

For capitalizing underground.

Andrew Pardey

Capital cost for the underground development.

George Topping – Stifel Nicolaus

I see. That’s great. Thank you.

Andrew Pardey

Thanks, George.

Operator

There are no further questions at this time.

Andrew Pardey

Sorry, there were no further questions. Sorry, I missed that.

Operator

That’s fine. Yes, there are no further questions.

Andrew Pardey

Thanks very much. Okay, thanks everyone for joining the call and meet you next time. Cheers. Thanks guys.

Operator

Thank you. That does conclude our conference for today. You may all disconnect.

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