Ian Atkinson – President and Chief Executive Officer
Michael Jalonen – Bank of America Merrill Lynch
Centerra Gold Inc (OTCPK:CAGDF) 19th Annual Canada Mining Conference Call September 12, 2013 8:10 AM ET
Michael Jalonen – Bank of America Merrill Lynch
And as I mentioned, Ian has extensive experience in the mining business. I’ve been following his career as long as I’ve been a gold analyst and he has made – I could say one thing about Ian, he has made a lot of exploration discoveries that had led to new mines. So it’s got a tremendous record. And I’ll mention we also have Jeff Parr, the CFO of Centerra sitting in the corner there.
So Ian I’ll pass it to you, lets introduce yourself?
Yes and thank you Michael. And I’ve seen Michael has been quite kind it’s a little more than 30 years unfortunately but had been after for quite a while. At Centerra Gold we operate in one of the most promising underdeveloped gold regions in the world. We have a reserve base at 11.1 million ounces and we’ve been operating the world-class Kumtor mine in the Kyrgyz Republic now for the last 16 years.
Since we commenced production there 1997, we’ve produced over 8.7 million ounces of gold and as I think many of you know this year we’ve been in discussion with the Kyrgyz government around some issues concerning Kumtor and will talk little bit more about that shortly. We’ve got a solid financial position, we had $16 million in cash at the end of the second quarter and we currently pay quarterly dividend which when annualized at current prices that will get you a yield of about 3%.
So just to bring your attention to the cautionary note about forward-looking statements in the presentation and also point out that all figures are actually in U.S. dollars unless pointed out otherwise.
Just looking to the events for 2013 around Kumtor and earlier this year in February the State Commission which was formed in the 2012 delivered its final report to Parliament in February. Parliament in that stage passed the decree on February 21 instructing the government to carryout negotiation with Centerra around the 2009 in agreement related to Kumtor.
The government reported back to Parliament on June 1 as required by the decree with an extension to the timeline and they have got an extension out to September 10. Our discussions continued with the government throughout December and the outcome of that was the non-binding memorandum of understanding that we announced on Monday of this week. And I will discuss that in a little later further.
So now our discussions will continue with the working groups to finalize agreements, which will then require a minority shareholder approval, in the meanwhile the government’s interest are in priorities, which we focused on continuing and maintaining continuous mining operations at Kumtor to realign again with ours.
A couple of other issues that we had at Kumtor this year in May, we announced the movements that we had on the Central Valley Waste Dump that required us to revise our waste dump strategy to get that approved by the government which we did in May, implemented it in late May, so that movement now are going to be slowed down, and is back to pre March, sorry pre May I beg your pardon movement rates.
In addition to that we also had a roadblock issue, Kumtor at the end of May protest around the Kumtor agreement that led also to power disruptions for two days, there was six days of disruption there. The operations were then back up in running on the second of June, now neither of these two events will have any impact on our production guidance for the year.
So moving now to the MOU, on September 9th hat was Monday this week we announced that we had entered into a non-binding memorandum of understanding with the government with the Kyrgyz Republic in connection with a potential restricting of the Kumtor project.
So Kyrgyzaltyn the state mining gentility, which holds the equity interest in Centerra will exchange the 32.7 interest in Centerra, it will also provide Centerra with a $100 million in future joint venture tax distribution, in return receiving a 50% direct interest in the joint venture company that will be formed the hold of Kumtor project. Kyrgyzaltyn will also receive six million warrants to acquire Centerra shares at a strike price of $10 and those warrants will be in place for two years.
The board of the new joint venture company would be established in the Kyrgyz Republic will have equal representation from both Centerra and Kyrgyzaltyn. And Centerra will continue to be the manager and operator of the project.
All of the environmental claims that have been brought against Kumtor in the last 12 months will be dealt with prior to the restructuring, and one of the other key element is 2009 agreement that are fundamental to the development of Kumtor will remain in full force and effect including 14% tax regime that’s established under those agreements.
So the MOU real this is a [indiscernible] slide. MOU will now form the basis for and allow us to complete negotiations with the government, once we’ve concluded those agreements, those negotiations with final agreements; those agreements will need a minority shareholder approval and also will have to be approved by the Parliament of Kyrgyz Republic.
In the meanwhile the Prime Minister actually now has to go before Parliament, request an extension to the September 10th deadline to complete those negotiations. And we expect he will be doing that early next week.
So now just moving on to the regular presentation, so I think you all know we’re headquartered here in Toronto; listed on the Toronto Stock Exchange, 236 million shares outstanding which today gives the market cap of $1.6 billion which still I think we believe reflects some of the uncertainty around Kumtor until we get these agreements completed. The company as I’ve said has a strong financial position, $316 million in cash at the end of the second quarter and still $74 million available to us under our $150 million lines of credit with EBRD. We pay a CAD$0.04 quarterly dividend which as I said when annualized gives us a yield right now of about 3%.
The 236 million shares outstanding Kyrgyzaltyn the Kyrgyz government state mining entity holds the largest position 32.7%, this will change with the restructuring that we are proposing, because once they are completed the shares of Kyrgyzaltyn will be canceled.
So we have two operating platforms the Boroo mine in Mongolia, Kumtor mine in Kyrgyzaltyn with a growing number of exploration opportunities throughout the region.
Looking at our operating performance certainly in 2012 our gold production was impacted by the unexpected ice movement that we have to the Kumtor in March of last year that caused us to rescheduled our mining plan for the year and delayed access to the high grade portion of SB zone, which had a significant impact on our production and our cost for the year.
This year, gold production is getting back to more normal levels and certainly the second quarter was better than expected at Boroo which actually has allowed us to increase our production guidance for the year 615,000 to 675,000 ounces for the year. In the third quarter we expect to have similar productions we have had in the first half of the year, but then we will see significantly stronger production in the fourth quarter particularly at Kumtor as we get down and back into the high grade portion of the SB zone.
The Kumtor’s production profile is returning to normal around 600,000 ounces this year starting in 2014, it will go up to 2650,000 ounces and maintain that for about the next 10 years. In the year of the recent significant decline in gold prices that we like many of our peers have been looking for opportunities to reduce our cost in expenditures. We have identified spending reduction to the order of $60 million largely from our global exploration program, also by a cancelling or delaying some corporate initiatives and a number of operating efficiency at both of our sites.
We’ll also continue to focus on further operating efficiencies that we should bring in later this year and into our 2014 planning focus. And at the end of the quarter, we also reviewed our capitalized assets and determined that as of June 30th we have no impairments. With the savings that we’ve identified, we have revised our cash cost for the year downwards and they are now shown here, but the cash cost profit ones in the range now $945 per ounce to a $1,040, that’s our all-in pre-tax cost, we do calculate that cost a little differently than our peers. We do include all of our capital and capitalized stripping, and sustaining capital and the growth capital and include all of our corporate cost, that’s G&A global exploration and our CSR [ph] expenditures.
And so you can see that even at these low gold prices we do still have a good margin and certainly well positioned to look at increasing that with increasing gold prices. I think one other point I should make that we do not read and we don’t really need any significant capital investments to maintain our longer term production profile.
If you look our first half financial performance, we produced 215,000 ounces of gold, at a cash cost $520 an ounce and all-in pre-tax cash cost of $1447, that’s generated earnings of $53 million or $0.22 per share and the cash provided by operations was $133 million or $0.56 per share. As I said, we’ve got a stronger balance sheet with $240 million net cash and at current gold prices we anticipate that we will consume some cash in the third quarter as continue to strip down to the high grade portion of the SB zone, but then late in the last quarter even in this low gold price environment we expect our cash balance to return to a level at the start of the year. We are maintaining our outlook for capital expenditures for this year by $107 million.
Key value to the gold in Centerra over the last several years has actually been the growth in our reserve base. Over the last nine years, we’ve invested about $240 million in explorations, during that time we’ve mined in 7.6 million ounces of gold, we’ve increased in our reserve base from 4.5 million ounces to 11.1 million ounces and that doesn’t include the high-grade 1.9 million ounces of high-grade inferred resources at Kumtor, or any other resources we’ve identified at ATO and Oksut, two of our exploration properties.
If you do the math on that we’ve been adding ounces for our reserve gold level of that period for about $17 per ounce. So now moving on to talk about our operations, Kumtor is our largest operation in the Kyrgyz Republic. Mines still has significant reserves ahead of it 9.5 million ounces, and a mine life that stretches out to 2026.
In November of last year we announced a new life-of-mine plan for Kumtor with an expanded open pit. That expansion added 3.6 million ounces or 58% to reserve base at Kumtor, it has also extended the mine life by further five years up to 2026. And in addition to that going forward, one of the benefits of this expansion is that we actually delivered fairly consistent quarterly production, the very flat rates of about 650,000 ounces per year for the next 10 years.
The plan achieved with fairly at lower growth capital about $170 million primarily through some additional equipment purchase and mill extension in 2015. The sustaining capital to the life-of-mine is $560 [ph] million, primarily through our equipment rebuilds. So on a pre-tax basis the life-of-mine cost, the operating costs all of the capital costs is stripping, sustaining in growth capital gives you a very attractive $728 per ounce cost for the operations life-of-mine.
And if you look at the value that creates using our reserve gold price of $1,350 and a discount rate of 8% that generate some $1.9 billion in a Net Present Value of stand point. To share a few more details on some of the cost and cash flow, if you look at the left-hand column. And you can see again the details of the operating cost, the all-in pre-tax costs that are listed there. So that when you look at the operating cost, capitalized stripping growth and sustaining capital is attractive $720 per ounce. When you add in the 14% growth revenue tax, there are $889 that raised it to $917 per ounce. So that using the $1,350 gold price we do use reserves that will generate $3.5 billion or $439 per ounce of gold production.
That said, in addition to actually extension of the mine life, one of the things we did focus on in this expansion was to try to develop or even production profile going forward. That would be a more consistent and more predictable. We have achieved that perhaps in 2014 we go up to 650,000, 660,000 ounces, then as stockpiles build in 2015, you can look at a mill expansion of 18% increase fairly low cost about $35 billion and has moved the mill from 16,500 tons per day to 17,400 tons per day.
And then that will give us a very consistent quarterly production going forward for the next 10 years. So we get away from this stripping down to the high grade portion of the SB zone that’s currently historically has always happened in the fourth quarter of the year and that certainly created future challenges [ph]. So this new plan actually significantly de-risks our production profile it makes it more predictable and provide significant and much cash flow going forward which is beneficial to Centerra and to our major shareholder currently the Kyrgyz Republic.
So just moving on now to Magnolia, we’ve been operating there now since 2004, produced 1.6 million ounces of gold from Boroo and in operation there and that mine actually has been a very good mine for us, its very profitable and produced some good cash flow, but its now close to the end of its mine life. We completed mining operations there in September of last year, we’ve now got about two years of stockpile keeping that running and we are also continuing to get gold from our heap leach operation there. We have also got Gatsuurt project in Magnolia and that’s got reserve right now of 1.5 million ounces of gold about 2.8 grams per ton.
Certainly in the first half of the year we have been very strong operating performance of Boroo and that actually has allowed us to increasing our production outlook for the Mongolian assets for the year to now to 65,000 to 75,000 ounces for the year, I should point out this slide still doesn’t include anything from Gatsuurt to this, development of Gatsuurt is still held up by the Water and Forest Law.
And we have access there in some and made some steps forward in advancing a number of matters in Mongolia over the last six to eight months. So in September of last year we did get our permits for heap leach operation of Boroo, so we got end up running again in October, its performed very well and of course since then late August we got the approval of the – to transfer or change the ATO exploration licenses to a mining licenses and once we’ve completed and filed a feasibility study that’s now allowed us to get back to exploration on that project.
And also recently we’ve been very encouraged actually with some developments in Gatsuurt, the Gatsuurt property actually has been included on a list of strategic deposits that will be put before the Mongolian Parliament when its resumes this fall for consideration. And if that list is approved and Gatsuurt is declared strategic, it will exempt it from head of Water and Forest Law which is the law that currently holding up the development of the deposits.
And as I think many of you may know, the Mongolian Parliament actually has nicely has been recalled early and actually will starting sitting next week and the Parliament is going to consider a number of initiatives to encourage for the foreign investment in the country particularly in the mining sector and that’s to respond to the significant decline that there has been there over the last year, year and a half as a result of the increasing nationalize [indiscernible] of the country.
And now just quickly talking about exploration, we had planned on spending $45 million on an exploration this year, we’ve reduced that now to $32 million and the primary reductions come from Kumtor where we don’t have access to the recent exploration program we planned because of the discussions with the government. And we’ve also had to reduce in our drilling in the Central pit that’s primarily because we don't have access to drill platforms to allow us to continue drilling down to the extension of the SB zone. We’re still continuing our focus on the ATO project in Mongolia and our Oksut project in Turkey.
Just to talk a little about the two other projects and certainly the Oksut project in Turkey is the one that we are most excited about. At the start of the year we announced closing of the transaction to buyout our [indiscernible] interest in this project, so we now hold a hundred percent of it. And certainly in 2012, 2013 the primary focus of work is on the Ortacam North Zone which is shown on the right-hand of this side.
The work we’ve done there has actually increased the footprint of that deposit significantly. Now we got a straight length of about 550 meters with the 250 meters to 300 meters, we got gold resources identified down to a depth 200 meters and the oxidation because now the oxidized deposit continues down to a depth of at least 450 meters with gold to at least 250 meters elevation.
The prospects on oxidized high-sulphidation epithermal system for example the initial test work on the mineralization have shown that it is amenable to heal leaching and gives some very good gold recoveries, so we’ve got some additional column testing going now on some larger samples we collected this summer.
At the start of the year published our resource for Oksut and that was based 52 drill holes in the Ortacam North Zone that’s the picture that’s shown here. 21 holes in the Ortacam Zone itself combined we’ve given an indicated resource of 682,000 ounces of gold and inferred resources of 477,000 ounces of gold. All this materials is oxide materials amenable to leaching and it’s got an average grade of 1.2 grams per ton, so very good growing heap leach opportunity.
And we currently have four rigs operating on the site completing infield drilling on the Ortacam North Zone, extension drilling time-to-time limits of the deposit. The deposit is opened to the south and to east and also doing some drilling for additional metallurgical sampling. We also got baseline environmental and social programs underway and that’s been carried out by SRK.
Certainly the drilling that we’ve done this year is supporting our resource model and actually improving it, we will be publishing those results with our third quarter update. This is just a cross section through the centre of Ortacam North deposit, showing some holes that we completed late last year and you see here ODD80 has the long intercept 196 meters of 3.3 grams and the undercut hole of ODD86 another 269 meters of 2.1 grams. All this material is oxidized and leachable and as you can see from this section the mineralization is either at or very close to surface to any potential pit operations here would have fairly low strip ratio.
So then quickly on to ATO and this is the other exploration opportunity we have in Mongolia to the Eastern step regions picture shown here, so its certainly there we should not have any issues with the Tree head Water and Forest Law and the work we did there is starting to – kind of like three years ago we identified – discovered three pipes, three [indiscernible] pipes there, three of which are mineralize, pipe three isn’t, one of them which is buried pipe four.
So we did a substantial amount of drilling on the pipes in the first year and half in 200 holes to outline the resource on it. We published our first resource in 2012 and which outlined 771,000 ounces of gold, 4.9 ounces of silver 230 pounds lead and 405 pounds of zinc. That work we done for resource definition purposes to allow us to convert the ATO exploration license to a mining license, spend on the very small footprint about 800/400 meters which is shown primarily y the red start on this slide.
We do have a much larger land package there that we’ve not we yet explored its about 35 kilometer North South 25 kilometers East West. Now we’ve got the ATO license converted, we can get back to exploration, so we are drilling some lead targets again carrying out further exploration on the property to access the overall potential opportunity.
So now as to summarize, we are continuing our dialogue with the Kyrgyz government to resolve all of the outstanding concerns around the Kumtor deposits and bring those discussions to a resolution that will benefit all of our shareholders. And certainly this week with the signing of the non-binding MOU on the Monday, that’s a significant step forward that now puts us in a position where we can use that to press forward to complete the final negotiations and definitive agreements that will then go the shareholders for approval.
With that our reserve increases last year, we now have 11.1 million ounces of reserves on our books proven and probable reserves that doesn’t include the high-grade inferred resources at Kumtor another 1.9 million ounces plus 11 gram material, nor any of the resources that we’re working on equals to ATO and Oksut.
We’re on track to access the high-grade SB zone at Kumtor at the end of this quarter, it will increase our production profile significantly going forward. And we’ve identified cost savings which has allowed us to reduce our outlook for the year, so our guidance has been reduced to $945 to $1,040 per ounce. And our production outlook has been increased to 615,000 ounces to 675,000 ounces a year.
We’ve got a strong financial position with the $316 billion in cash; we are paying a dividend that gives a 3% yield going forward, and as I said, we’ve got a number of exploration projects in the region and certainly the one that we’re most excited about is the Oksut project that we are pushing forward to bring it to a decision point as quickly as possible.
So with that Michael, I will pass it back to you and I’ll be happy to answer any questions at this time.
Michael Jalonen – Bank of America Merrill Lynch
Thank you. I think there is time maybe for one question. One in the front row and can we have a microphone phone for him please. I think there might be some people looking online.
Hi it’s James Hay at the Most Point Investment [ph]. I wondered if you could talk us through the process of getting the MOU approved in country, does that have to go to a special committee then report on it going back to parliament, or does it go to the parliament as you understand. And could you also give us what guidelines you count on timelines.
Is the – actually the MOU has already gone through, there is an advisory counsel that has to review it, they give unanimous approval on Monday and it has to go to cabinet that was done on Monday got unanimous approval from the cabinet. And it now has to go – in fact it’s been delivered to parliament that was done on Tuesday the 10th of September. And we expect the Prime Minister of parliament to discuss the extension early next week. It would normally be done this week, but with the Shanghai Cooperation Summit going on in Bishkek right now, so you’ve got the heads of state of China, Russia, Tajikistan, Kyrgyzstan, Uzbekistan there. So that there’s not much going on in parliament, so as soon as that’s finished he will be before parliament either Monday or Tuesday.
Once that extension is granted we’ll then move forward on defining the -- or completing the definitive agreements. And then they have to go before the parliament for approval, as well as before our minority shareholders. So the timeline to get the negotiations completed, we will, actually we’re working on but I would expect it’s going to not for just the negotiations but all the paper work of the agreements, that’s probably going to take us towards the end of the year and the approval process through the Kyrgyz’s parliament should be relatively quickly. And then for ourselves, to our shareholders it’s just the normal timeline that one has to deal with recalling special meetings. So hopefully by the end of the year or early into the New Year. Does that answer your question?
Michael Jalonen – Bank of America Merrill Lynch
Okay I think we’re out of time. So if you could all join me and thank Ian and Centerra for the presentation. And thank you again.
Thanks. Thank Michael.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: firstname.lastname@example.org. Thank you!