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Start Time: 15:10

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Kinross Gold Corporation (KGC)

Company Conference Presentation

December 03, 2013, 15:10 PM ET

Executives

Tony S. Giardini - EVP and CFO

Unidentified Analyst

Our next speaker is Tony Giardini, CFO of Kinross. Tony was appointed CFO of Kinross on December 1, 2012, so happy anniversary there, Tony. Previously, he was Senior Vice President and CFO of Capstone and CFO of Ivanhoe Mines. Welcome.

Tony S. Giardini

Thanks, Tanya [ph]. Thanks to Scotiabank for the opportunity to present with a conference and provide you with an update on Kinross. As Tanya said, it's my first anniversary. I joined Kinross about a year ago and I might have bought the highest here with gold of 1,700 when I joined, so it's been an interesting year. But what I want to do today is just talk to you a little bit about Kinross and what we've been doing there over the past year.

Let me start by drawing your attention to Slide 2 which contains our cautionary statement on forward-looking information. Starting over a year ago, we began to take Kinross in a new direction. We rolled out what we called the Way Forward and the continuous improvement initiative which is focused on operating performance, reducing costs, improving cash flow and margins. I'd like to stress that we rolled this out in a quite different gold price environment. This was rolled out in August of 2012 when gold was roughly $1,700 an ounce.

To summarize that strategy it's based on four key principles. The first principle is operational performance which means delivering on performance targets quarter-after-quarter. Secondly, it's pursuing high quality ounces not production at any class. Thirdly, it's being disciplined in balancing our projects, using our capital prudently and reducing execution risk until the decision that we make on capital. And lastly and especially in this price environment, it's about maintaining our balance sheet strength and preserving our liquidity position.

So this process began when gold prices were much higher as I stated earlier but has positioned us very well for the current environment and what I'd like to do today is just take you through an outline of how we're delivering on this strategy. I'll be speaking about each of the four key principles and I'd like to start off with operational excellence.

As you can see from this slide, we operate open pit and underground mines in a wide range of climates and geographies from a high arctic to the dessert to the jungle. Over the past year we've set a high priority on operational excellence and continuing to deliver on our commitments. And I'm pleased to say that we are delivering both on a consolidated and regional basis.

Let's look at our track record. We announced our third quarter results last month and I'm pleased to announce that we reported another very strong quarter. It marks the fifth consecutive quarter where we delivered strong operational results. It included record production at two of our mines and it's gratifying to see that this consistent performance is an area for the business that we can control.

Our Q3 production increased year-over-year and was also higher than our production in the second quarter of the year. We're looking forward to an excellent year overall and we've increased our production guidance to 2.6 million to 2.65 million ounces from our original guidance of 2.4 million to 2.6 million gold equivalent ounces. For the full year we expect to be at the low range at the low end of guidance for both cost of sales and for our all-in sustaining costs.

So how do we drive performance improvements at our mines? We track our progress on these seven levers every quarter and at each of our sites. We've also modified the compensation incentives for our managers to align with these levers and as a result, we're seeing measurable improvements in a number of areas. I'd now like to give a quick review of our operations and touch on a few examples of what we've achieved.

Our North America region accounts for about a quarter of our production. The mines are consistently among our top performers and there's a strong culture of innovations at these sites. We see North America as a strong training ground for our people where many of our best managers start out there and we move them to other regions, and I'll touch a little bit on that when we talk about South America and Tasiast.

Fort Knox in Alaska is our largest North American mine. We just produced a record 122,000 gold equivalent ounces in the third quarter. Considering that Fort Knox has been operating for over 16 years, this was an impressive achievement. We're very proud of our performance of the Fort Knox heap leach which has been hugely successful in processing lower grade material. It's one of the world's few cold climate heap leach facilities and a great example of innovation, and it's that innovation which has led to increased production, longer mine life and lower costs.

Kettle River is an underground mine and mill that's located in Northeast Washington state. We consider it a small gem in our portfolio. It has a limited mine life but it contributes significant cash flow and it's one of our lowest cost producers. Round Mountain in Nevada which is a joint venture with Barrick has a long history of production and it's a mine life that extends until 2024. The operation runs like clockwork. They have a highly disciplined daily routine, excellent work culture. We see them as a best practice leader in areas like preventive maintenance when it comes to things like truck utilization, tire life; they're among the very best in the industry.

South America, the region comprises our mines in Chile and Brazil. It accounted for about a third of our production year-to-date. Two in Brazil are two of the best mining jurisdictions on the continent and both have a long history of welcoming foreign investment and mining. Our mine at Paracatu is one of our largest long life gold mine and it's the largest gold mine in Brazil. We just delivered record production in the third quarter which is a testament to the results we've been achieving to our focus on operational excellence and continuous improvement.

Last year we completed the construction of expansion projects and a lot of capital spent at Paracatu over the years and last year was a sort of final year of construction. We've refocused our efforts on improving operating efficiencies. We removed a number of contractors that were on site and we brought in some personnel from our North American region to assist the Brazilian team and the achievements are starting to show. The new team is steadily raised [ph] recovery and throughput and improved other key metrics. Right now we're running about 5% higher on recovery rates than our original plan. And we're establishing a solid record for dependable and improving performance.

Maricunga was an outlier for us in Q3 with some production issues that impacted costs. It's a challenging operation. It's a low grade mine and a high altitude study. We've put a new team in place and what we're doing is exploring every opportunity to improve production and cash flow. It's the same team that drove improvements for efficiency at Paracatu and what we've done is we've given them or we're going to give them about a year to see if we can turn this operation around and I want to stress that if we're not able to generate an acceptable return, then we'll look at the difficult decisions of what we're going to do with Maricunga in the future.

La Coipa is a good example of how we apply this principle of quality over quantity. La Coipa has been mined for 24 years. It's produced an excess of 3.5 million ounces of gold equivalent ounces. Last year in different gold price environment, we made the decision to suspend mining as we didn't see a compelling return on the many reserves. We didn't want to mine the remaining reserves for production sake, so we finished mining the existing ore body at the end of October of this year, but I want to stress that what we've done is we've suspended but not closed the mine and that's because La Coipa has a number of satellite deposits that we're currently drilling to see if there's an opportunity to restart economics or restart the operations with better economics.

We've handed the initial discovery which we call Phase 7 over to our projects team and we're drilling a second discovery at Catalina which is located 800 meters from Phase 7. So stay tuned. As drilling continues we hope to come back with a new better mine at La Coipa and hope we have an update on our exploration results as part of our yearend reporting in February.

West Africa region includes Tasiast and Maricunga and Chirano and Ghana which are both good support of mining jurisdictions. The relatively new countries for Kinross and both have very promising exploration potential. The region generated about 19% of our year-to-date production.

Let's start by looking at what we have at Tasiast. It's an existing mine with an 8,000 ton per day mill that was originally designed to process ore from small open pits. We also have a large high quality resource of about 15 million ounces of gold. So the question is does it make sense to build a bigger mill from ore body that size? We completed a pre-feasibility study earlier this year which suggest that the optimum mill size is 38,000 tons per day. As we finish our work on the feasibility study which is on schedule for completion in Q1 of 2014, we'll be exploring a number of opportunities to improve project economics. However, we will not proceed with the mill expansion unless there's a compelling value proposition for shareholders.

We are focused on maintaining our balance sheet strength and as part of our capital reduction initiative, we do not expect to make a decision on a mill expansion until 2015 at the earliest regardless of the feasibility study results. So we'll get back to you when we finished our work and hopefully we'll have some information to report in Q1 on the results of the feasibility study.

It's important to remember that Tasiast is located on a prospective 80 kilometer trend, so in addition to the 15 million ounces we've identified by drilling the main ore body, we're getting encouraging results from our early exploration efforts as we look at several targets along the trend and we expect to provide a detailed update on our exploration results with our yearend results in February.

Chirano in Ghana is an excellent example of folks, you know, what cost we can control, in this case the use of contractors. We have successfully implemented self perform mining in the open pit, so this is an instance where we've actually hired more people as opposed to decreasing our workforce. We've eliminated more expensive consultants. We've reduced our surface mining costs per ton by 50% and we're now looking at implementing self perform in the underground. In addition, we're advancing work in a number of prospective exploration targets on site.

Our fourth operating region is Russia which includes the high grade Kupol and Dvoinoye mine. It's among our lowest cost highest margin operations. Our Russia team has a great track record of operational excellence. We've been operating in Russia for nearly 20 years and the region is being a very stable contributor. Kupol is a great asset. It's a high grade, low cost underground mine and mill operation.

Despite the challenges of its remote location, Kupol has been one of our strongest and best run operations since we opened it in 2008 after we acquired it from Bema. And I mentioned that we acquired it from Bema because Clive says that we never mention that we've acquired this asset from Bema. So if Clive's out there, please note I've done my part. It's a great example of continuous improvement. We've increased real throughput from 3,500 tons per day to its current level of 4,500 tons per day with very low capital.

Dvoinoye which is our newest mine is a high grade, low cost mine located just 95 kilometers from Kupol. We're able to truck its ore to the Kupol mill where we can use existing infrastructure for processing. Commercial production commenced at Dvoinoye in October on time and on budget and annual production is expected to be between 235,000 to 300,000 gold equivalent ounces during its first three full years of production. Dvoinoye is now the fourth mine Kinross is operating in Russia. And given our history of success at Kupol, we're very excited to see the contribution from Dvoinoye coming on screen. We also continued to be excited by the exploration prospects in the Kupol region. For example, we've had some very promising results from our drilling program at Moroshka which is located 5 kilometers from the existing mine.

Now I want to turn to the second key principle in our Way Forward strategy which is quality over quantity. And this is about changing our focus from production volumes to margins and cash flow and it applies to everything we do from exploration through to production. There's many examples across the company such as our decision on reserve pricing where we've used $1,200 gold price assumption for the last two years. So in spite of an average price of approximately $1,670 in 2012 we maintained a $1,200 gold price assumption for our 2013 reserves and I'm sure Tan is going to ask me what we're going to use for 2014? We haven't made that decision but I would suggest that $1,200 is probably the likely place where we'll end up.

So as a result we've been able to target higher quality, higher margin ounces with less capital intensity and there's a tradeoff here and that tradeoff is that we've reduced our overall resource estimates year-over-year but it's put us in a much better position from a mine planning point of view in the current gold price environment. The principles also guided our mine planning at Maricunga and La Coipa and we're applying that at our other mine as well. Another example is Dvoinoye. We've prioritized this high quality, high margin project over other opportunities that could have made a bigger impact on production but not the bottom line.

Our third Way Forward principle is discipline and capital allocation and this slide says it all. We started the year with guidance of $1.6 billion. That forecast was reduced to $1.45 billion last quarter after we identified $150 million in reductions. We've identified another $50 million in savings and we've lowered our 2013 CapEx guidance to $1.4 billion. Looking ahead we're right in the middle of our budget process right now for 2014. We did provide preliminary guidance for '14 between $800 million and $900 million including capitalized interest. So if you strip out the capitalized interest that means $730 million to $830 million.

We haven't broken that out between sustaining and opportunity capital but if you look at our last year forecast, we had about $590 million in sustaining capital and $170 million in opportunity capital, so that would give a good estimate of where we're going. I think where we ultimately end up on capital will largely depend on where the gold price is going to go and what we'll probably do is look at our sustaining capital as a base and build a small opportunity fund which will have the sites compete for in terms of aggregate capital. So we'll be coming out with a more definitive number on our capital when we release our guidance in February. But I think the key message for us is that we began a trend a year ago of reducing spending and maintaining capital discipline.

So in the current environment, our last Way Forward principle could easily be called our first. Volatile gold price has resulted in reduced cash flows have clearly made this a key priority for all gold producers. As of September 30, 2013, Kinross had $2.5 billion in liquidity with a net debt position of $1.1 billion. We've taken a number of actions this year to specifically strengthen our balance sheet. We've reduced our outstanding debt by approximately 20% to repurchasing $460 million in convertible notes in March of this year.

We extended the maturity date of our revolving credit facility to 2018 and our term loan to 2017. We have one covenant in our debt facility as a net debt to EBITDA covenant 3.5 to 1 and we're currently sitting at 0.68. As a result Kinross had no significant debt maturities prior to 2016. We see it preserving of the strong balance sheet and maintaining investment grade credit rating as a key priority and we think that this is consistent with the capital discipline that I just outlined. It's also driving an acceleration in our efforts to reduce costs and cost to company.

In addition to the $200 million in cuts to our capital spending plan, we also cut our exploration budget by $30 million this year. This will result in total expected savings of $230 million. In addition we've looked for reductions in our administration and overhead costs. We identified about $20 million in annual savings which equates to 15% of our 2013 G&A budget. This will result in a streamline administration which is working more efficiently and we'll continue to focus on the reduction of discretionary spending.

We've also made the decision that we announced last month to integrate our North and South America regions into a single administrative region known as the Americas with that office moving from Reno to Denver. We're continuing all of our efforts and we'll provide a detailed guidance in 2014 when we release our Q4 results in February.

So let me recap. Last year we took the company in a different direction. We said we would focus on operational excellence. We have five straight quarters of solid performance including record production at two of our mines. We increased our 2013 production guidance and expect to come in at the low end of cost for this year. We said we would be focused on margins and cash flow not just production. The Way Forward strategy launched in August 2012 provides a clear framework to pursue quality over quantity and not just production at any cost.

We said we would be aggressive in managing costs. We've cut our CapEx spending by $800 million from where we were a year ago and we expect further significant reductions next year. We said we would maintain a healthy balance sheet. We've finished the third quarter with $2.5 billion of liquidity and maintained our investment grade credit rating. And given the continued volatility in the gold price, we've strongly reaffirmed balance sheet strength as a priority objective going forward.

In conclusion, we've made a lot of progress in a tough environment. Our strong operational performance and the difficult decisions we've made are starting to get noticed. So let me leave you with a few simple takeaways. We produce a lot of gold, 1.9 million ounces year-to-date. I sat down earlier today and I calculated our top five mines for production for this year and we're going to produce that, those five mines; Chirano, Kettle, Fort Knox, Paracatu and Kupol, 1.9 million ounces with all-in sustaining costs of $831. Our all-in sustaining cost for the entire portfolio is $1,045 which is respectively in the middle of the pack relative to our peers. And these metrics suggest the compelling value opportunity. We intend to stay the course, to keep delivering results and make necessary tough decisions and we hope that over time, the market will recognize our efforts.

I'd be happy to take any questions.

Unidentified Analyst

Only one question since we've run out of time. Any question from the audience? Okay, I guess no questions. Thank you very much, Tony.

Question-and-Answer Session

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