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Kinross Gold Corporation (NYSE:KGC)

CIBC Institutional Investor Conference Transcript

January 24, 2014 11:35 AM ET

Executives

Tony Giardini - Executive Vice President, Finance and CFO

Analysts

Alec Kodatsky - CIBC World Markets

Alec Kodatsky - CIBC World Markets

Okay. I believe we are ready to begin the next session. It’s my pleasure to introduce Tony Giardini, Executive Vice President, Finance and CFO of Kinross Gold. So, I’d like to welcome Tony to stage. Thank you.

Tony Giardini

Thanks, Alec. And thanks to CIBC for the opportunity to present your conference, provide an update on Kinross. Before I get started, I just want to draw your attention to our cautionary language on slide two regarding forward-looking information.

Starting in the third quarter of 2012, we begun to take Kinross into direction, Paul Rollinson became the CEO and we rolled out the Way Forward strategy and that strategy is focused on improving operating performance, reducing costs, improving our cash flow and margins.

To summarize that strategy, it's based on four key principles. The first principle is, operational excellence, delivering on performance targets quarter-after-quarter. The second principle is pursuing high quality ounces and not production at any cost. And the third principle is being disciplined in advancing our projects, using our capital prudently and reducing execution risk. And our last principle especially in the current environment is maintaining our balance sheet strength and liquidity position.

Although, we began this process when gold prices were much higher, we are well-positioned in the current gold price environment. So today what I would like to do is just briefly provide an outline of how we are progressing in terms of delivering on this strategy.

I'll be speaking about each of our four key principles, so let's start with the first one which is operational excellence. As you can see, Kinross has a very diverse portfolio of assets. We operate open pit and underground mines in a wide range of climates and jurisdictions from a high Arctic to the desert to the jungle.

For the past year, we've set a high priority on operational excellence and consistently delivering on our commitments, and I'm pleased to say that we have been delivering, both on the consolidated and regional basis.

Let's look at our track record. We announced our third quarter results in November and have marked the fifth consecutive quarter where we delivered strong operational results. It included record production at two of our mines namely Fort Knox and Paracatu, and it's gratifying to see this consistent performance in those areas of the business we can control.

Now we haven’t provided an update as of our full year performance, which we will be doing in February but we did indicate that we would increase our guidance to 2.6 million to 2.65 million ounces for full year production for 2013 and we are certainly on track to do that and we expect to be at the low-end of our guidance range for our operating cost and all end sustaining costs.

Let’s turn to the second principle the Way Forward strategy which is quality over quantity. 16 months ago we changed our focus from production volume to margins and cash flow, and we're applying this everything we do from exploration through to production.

For example, in spite of an average spot price in 2012 was approximately $1,700. We maintained the $1,200 gold price assumption for our 2013 reserves. And as a result, we run our mine plans at our mines using $1,200 as well and we targeted higher quality, higher margin ounces with less capital intensity.

The trade-off, of course is that, we reduced our overall reserves as a result on year by - year-over-year basis. But we are much better position from a planning perspective in the current gold price environment.

This principle is also guided our planning at our operations at Maricunga and La Coipa in Chile and we are applying at other mines as well. So at La Coipa for example we continue to have reserves there, but we've taken the position that rather than recreationally mine the remaining reserves, we are going to look at exploration potential in the district and reassess where we’re going to go with that assets. So we’ve suspended that mine in the fourth quarter of 2013 and would be looking at it from a development perspective going forward.

Another example is Dvoinoye. We opened Dvoinoye in the fourth quarter of -- in – actually 2013, commencing commercial production in the fourth quarter. We expect Dvoinoye to average between 235,000 and 300,000 ounces of production on an annualized basis for the first three, four years of production.

Now when we looked at bringing Dvoinoye on, we had other assets in the portfolio that could have provided a greater production but we felt that the high-margin nature of the Dvoinoye operation coupled with the existing Kupal infrastructure made up far more -- made it a far better investment opportunity as opposed to looking at production -- higher production assets and higher capital investments.

Our third Way Forward principle is disciplined and capital allocation. So we started 2013 with the capital estimate of $1.6 billion. In Q2, as gold price decreased, we reduced our capital estimate to $1.45 billion with the further $50 million reduction in the third quarter, lowering our CapEx guidance to $1.4 billion.

We’ll be updating the market as to where we actually came in, in February. In November, we also provided a preliminary guidance for 2013 -- 2014 of between $800 million and $900 million including capitalized interest. And what we've done as goal price continued to decrease in the fourth quarter, we’ve gone back to our regional operations and we’ve challenged them to look at capital number and look for opportunities to further reduce that and we’ll be providing an update to release our guidance in February. The key message is we’re continuing that trend that we began over year ago of reducing our spending and maintaining capital discipline.

The last component of our Way Forward strategy is maintaining a strong balance sheet. And at September 30, 2013, Kinross had approximately $2.5 billion of liquidity available to have $1.5 billion undrawn credit facility, $900 million -- $990 million in cash and net debt position of $1.1 billion. We have no near-term debt maturities with the most significant maturity coming in 2016 when we have $250 million due on a bond and we have a term loan that’s due in June 2017.

We have one debt covenant in our -- with respect to the outstanding loans that we have. It’s a net debt-to-EBITDA covenant of 3.5 times to one. At September 30th, we’re at 0.69 and including our letters of credit, we would be at 0.83, so well within the terms of that covenant. And we’re continuing to focus on maintaining our investment grade credit ratings and continuing to maintain a strong balance sheet going forward.

So let me recap. Last year, we took the company in a different direction. We said we would be focused on operational excellence. We’ve had five straight quarters of solid performance, including record production at two of our mines in Q3.

We increased our 2013 production guidance and expect to come in at the low end of cost. We said we would focus on margins and cash flow, not just production. The Way Forward strategy launched in 2012 gives us 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 go and we expect to have further significant reductions in 2014.

We said we would maintain a healthy balance sheet and maintain our investment grade credit ratings. And given the continued -- we finished the third quarter with $2.5 billion of liquidity and given the continued volatility in the gold price, we've strongly reaffirmed balance sheet strength as a key priority going forward.

In conclusion, we've made a lot of progress in a tough environment and our strong operational performance and the difficult decisions that we made are starting to get notice. So let me leave you with a few simple takeaways.

We produce a lot of gold. We produce 1.9 million ounces for the first nine months of 2013. As I said earlier, we expect to come in between 2.6 and 2.65 million ounces of production for 2013.

Our all-in sustaining costs of $1,045, which is respectively in the middle of the pack relative to our peers. And this metric suggest a compelling value opportunity. We intend to stay the course, keep delivering results and making the necessary tough decisions and we hope that over time the market will recognize the value that we are delivering.

With that, I would be happy to take any questions.

Question-and-Answer Session

Alec Kodatsky - CIBC World Markets

Thank you very much, Tony. I will let you take time to take a seat and I will turn it to the crowd to see if there are any initial questions. Okay. I guess maybe starting with the most topical, there is recently press surrounding situation at Tasiast with a number of layoffs and our response to that. I’m just curios if you can speak to that and perhaps provide some color around the situation?

Tony Giardini

Sure. In fact I just returned from Tasiast. I was there just before the conference. We were having an off-site and we went to the site and layoffs, was a part of the discussion. We laid off approximately 350 people in December and it was a difficult decision to do that. But what we've been doing at Tasiast is really demobilizing the project team that was on-site that occurred during the summer for 2013. And since that time, we've really been looking at the operation in the context of the current gold price environment and assuming that we are not going to make any decision to go forward with respect to an expansion of 2015 that necessitated changes to the mine plan.

So as a result, we looked at what the headcount went was and felt that it was appropriate to make those reductions. We've had discussions with the government about that decision. Obviously there have been some issues raised and we continue to engage with the government going forward. But we’ve been very clear that we can't operate a mine like Tasiast and continue to make substantial investments with out of view of generating operating cash flow at that operation, whether we ultimately expand the mill or we do not.

So the decisions that we've made are really for the long-term benefit of the operation and to protect the other two plus thousand jobs that are at Tasiast right now. We have approximately 1,200 employees plus an additional 1,000 contractors on site. So it's a very delicate balancing act between reducing, making those necessary reductions and really focusing on sustaining the operational longer-term and that’s what we are trying to do.

Alec Kodatsky - CIBC World Markets

And with respect to the potential expansion of Tasiast, is it as much a balance of reigning and reorienting the existing plan, or is there still an element of exploration success that’s required in order to convert the project into a more attractive opportunity for it?

Tony Giardini

I don't think we need any more exploration successor. We have 15 million ounces of resources. And it sort of flipped back and forth between reserves and resources. But at the end of the day, the mineral inventory that we have at Tasiast, is more than enough to sustain and expand the mill operation and that’s stock growth what’s really going to drive the economics.

What we said is that we are going to come out with our feasibility study in this quarter, probably towards the latter part of the quarter. We will provide all of the necessary information for the market at that point in time. Regardless of the outcome of that feasibility study, we won’t be making any decision from an expansion perspective until 2015 at the earliest.

And we will also be providing an update with respect to exploration and we continue to believe that it's an 80 kilometer trend. There continues to be a lot of upside and we are very positive with respect to finding additional ounces there. But our decision to move forward with respect to the expansion and really that's what we are talking about at Tasiast. We are talking about an operation that is already producing gold and it has a mill that was designed for much smaller pits, and was designed for the 50 million ounce resources there.

So the feasibility study is really focused on -- we know 38,000 tonnes a day makes the most sense. What’s going to be the cost of building out a 38,000 tonne a day operation? What type of return will we expect in making that investment? And that's really what we're looking to answer when we come out with the feasibility study. And as I said, there is no decision that’s going to be made in 2014 with respect to Tasiast, regardless of the results of that feasibility study.

Alec Kodatsky - CIBC World Markets

I’ll try the crowd once again. Maybe to get back towards the Way Forward strategy, it’s clearly been successful, I guess in its goals in terms of lowering costs and stabilizing production. Where would you see yourself being in terms of a benchmark or percentage through that process, are you nearing the end or you still seeing more that you can do over the coming quarters and years?

Tony Giardini

Yeah. That's a good question. And I think what the Way Forward has done and Paul Rollinson and Brant Hinze get a lot of credit, because they are two that really institute that program in July when Paul took over as a CEO and Brant became President and Chief Operating Officer.

What we really focus on is continuous improvement at all of the operation. The assets that we have or the asset that we have and some of them are great challenge, but what we're really focused on doing is getting the most out of those assets.

And why we're starting to see is a pride of ownership is coming with how these operations are progressing in terms of some of the things that we doing. So Paracatu is a good example. It’s going to be on track to produce over 500,000 ounces of gold this year.

And what we saw is some low-grade operation 0.37 is a grade there. And what we saw is a real improvement in terms of recoveries and just continuous improvements initiatives across the Board. It wasn't tide to weakness in currency. It wasn't tide to improvement in grade. It was really processes that we’re looking at.

So, on a go forward basis, how much more is there that we can do? We think that they're on a number of assets we have a lot of upside that we continue to pursue. The challenge that we have is when we look at our cost structure, when we looking at operating costs, labor accounts was 33% of our cost, excuse me, 37%, energy is 24% and 33% relates to consumable.

So labor sticky, very difficult to see substantial decreases in labor unless we swap between contractors and employees or we go from employees to contractors, actually reducing labor costs is very challenging.

Energy we have got opportunities there. We have brought a new power plant on stream at Tasiast. We’ve entered into a long-term power contract at Paracatu. So we continue to look at opportunities there.

And then on the consumable side like a lot of other companies we’ve been looking at long-term contracts in terms of locking in items likes tires, cyanide, grinding media et cetera. So we think we have more opportunity on the consumable side.

The last area that we really haven't spent a lot of time on is inventory and working capital management. So we’re starting to turn our attention to that area and we see that there is continued opportunity to look at that.

And then lastly, we talked about capital and what we've seen with respect to capital reductions. And our operators get a lot of credit. We’ve pushed them very hard to be in a position to operate in the current price environment and we've asked them to look specifically at capital and the capital spent going forward.

So when we come out with our capital number, we indicated $800 million to $900 million for 2014 preliminary guidance in November, which includes capitalized interest, so if we strip out capitalized interests at $730 to $830.

And what we expect to see is that number coming in below that level as we challenge the operations to really look for an opportunity to reduce capital. How sustainable is at long-term that that’s a bigger question, because we have to continue to reinvest in this business and while we're doing our best in the current gold price environment, I think, it's a challenge if we stay in this price environment for a long period of time, but that’s where we are focused on doing in terms of running the company right now.

We had one of the one-on-one that we had yesterday, was someone from Seattle. We were talking little bit about the Super Bowl and been from Vancouver, I am clearly cheering for the Seahawks. We talked about how de France win Super Bowls and that’s how we’re looking at it right now with Kinross.

We are focused on de France being defensive in terms of running the business, given the uncertainty in the gold price environment, which is something that we can’t control. So focused on what we can control on the go forward basis.

Alec Kodatsky - CIBC World Markets

And I guess, maybe to wrap that into, the points for the Way Forward strategy and I guess, mixed with what you’ve just said. The aspects of capital allocation and balance sheet discipline, how is Kinross thinking about growth at this point of time?

Tony Giardini

Well, we have growth assets within the portfolio. As I said during the prepared comments, we opened a new mine in Russia. So Dvoinoye is fourth mine that we’ve operated in Russia and that’s going to produce 235,000 to 300,000 on an annualized basis for three years. We’ve got exploration targets in Russia around the mine side that we’re focused on in bringing in addition material which for what we’re seeing with Dvoinoye in terms of initial production is generally very high grade. So we’re optimistic that, that will lead to additional resources and increase the mine life associated with what we're doing at the Kupol and Dvoinoye.

We talked about the La Coipa. La Coipa, it looks very promising from an exploration perspective. We’ve got couple of interesting discoveries here and what we've really done is we've taken a step back and we said there is existing research here. We can continue to operate that asset but let's just see if there's a bigger opportunity here and let's see what more concentrated exploration program will be when we don’t have this sort of fight the operations of the existing mine and see what was there.

So we’re optimistic that something will come of La Coipa, and then Tasiast has 15 million ounces of gold. We issued the preliminary feasibility study and you could see production levels in excess of 750,000 to 800,000 ounces on an annualized basis. But it has to be a compelling value proposition for us to move forward with respect to Tasiast.

And so what we’re going to be doing. So we’re going to complete the work. We’re going to do the feasibility study. We’re going to report it to the market and then we’ll make the decision in 2014 -- excuse me, 2015 in term or remain at the earliest 2015 in terms of where we’re going to go with respect to Tasiast. We have other opportunities within the portfolio but really I think they’re going to be more dependent on higher sustained gold prices.

So its not -- north items that we’re looking at. We’re not focused on corporate development activities at the current time. We're obviously continuing to look at the landscape but we feel that if we are conservative in terms of how we run the business, maintain our balance sheet strength, that’s going to give us the flexibility to look at opportunities at the right time and that's really the approach that we’re taking right now.

Alec Kodatsky - CIBC World Markets

And I guess maybe to ask a question about the organic strategy. Is it more of the factor that you now better understand your operating assets and have taken a closer look at them that leads you to identify these opportunities where you may not have -- you may not have previously?

Tony Giardini

I think the company is evolving a fair bit from where it was five years ago in terms of the technical expertise that exists within the company. And I think where there weren’t a lot of technical in-house skills that's changed dramatically over the last several years. I think Paul Rollinson is a mining engineer and a geologist. He understands the business. He’s made an effort to visit all of the mine sites that we have. So I think there is a real focus on operational excellence and that's really what we've been trying to focus on.

So I know that you can come to these presentations and when you hear the same type of discussions over and over again, we’re going to make a tough decision, we’re going to operate our assets more efficiently, we’re going to reduce capital, we’re going to reduce costs. We've been on that mantra when the gold prices were $1700. We started that in July and we’re not going to stop now. In July of 2012, we’re not going to stop now. That is our real focus in terms of running the business and hopefully that’s the way they will differentiate ourselves from some of the other companies in our space.

Alec Kodatsky - CIBC World Markets

Okay. We’ll look to the crowd one more time. Good.

Unidentified Analyst

(Inaudible)

Tony Giardini

It’s a good question. I think the biggest opportunity we have is probably just how Russia is sort of progressing. We brought Dvoinoye on stream and we saw 30 gram material running through the mill in the fourth quarter. So we're pretty optimistic that we’re going to have an excellent year out of Russia when we actually have started to put our guidance together in 2012 -- excuse me, 2014.

We think there's opportunity for higher production out of Russia and continue to see good cost control. Where we see a bit of a challenge is probably going to be in the West Africa region. When our guidance comes out in February, you’ll see that we’ve really pushed hard and this comes back to the comment about how we want to run Tasiast. And Chirano has actually performed quite well but how we’re going to run Tasiast and we’re pushing them very hard to bring their cost down dramatically. Part of it will be through these labor reductions. Part of it will be through power at a much lower costs. Part of will be through just not having all of this contractors on site. But it is going to be a push for these guys to get there.

So, I think that's where we probably have risk when we come out with our guidance, that's where we're going to have a bit of challenge and the guys know, that we're very focused on it. So the meetings that we just had in West Africa, was really focused on reinforcing that we're in the current gold price environment that we're in, we need to continue to operate the assets effectively and there is a really push to asking these guys to deliver. So that's where we probably see the biggest risks in terms of just guidance on operating costs and production levels coming out of West Africa.

Alec Kodatsky - CIBC World Markets

And I guess maybe the leverage and the opportunity to sit with the over backlist and I thought the comments you are making about your approach to views on costs and how Kinross is adopting what maybe viewed in the context of the industry as a more conservative all-encompassing costs to be relatively interesting. And I think perhaps a different way in which -- a differentiated way in which you are planning your business. I'm just curious if you could provide some thoughts around that?

Tony Giardini

Sure. Sure. Alec and I were talking about reserves and reserve pricing. And as I said in the prepared comments that we’ve used 1,200 for the last two years and we expect to use 1,200. And in fact our operating plans at the mines are basically being run at 1,200 in some cases lower price scenarios. And what we've really been focused on doing is using fully loaded costs to come up with our reserves.

And so what that means is that at some of our operations, so when you look at 43-101 and the criteria that 43-101 provide us for calculating reserves. They are certain costs that don't necessarily need to be included in terms of reserve calculation. Yet you would include in that big NPV spreadsheet that you are putting together and determining the economics.

So what we're doing is we're really looking at all of the loaded -- all of loading costs -- loading all of the costs associated with reserves. So, for example, in Paracatu, we're look at the tailings dams and continued management and costs associated with tailings dam, which under 43-101 basis, we would necessarily need to include but we're starting to add that in.

So what we're trying to do is ensure that we are actually mining material, if we are focused on $1,200 gold prices as far as reserves and operating plans. And we're going to make money at it. We're not going to have some negative surprise going forward. I can't speak to what others are doing. But what I can say is that, because we've been operating in a 1,200 environment with respect to reserves over the last year, we have a lot of confidence in how our mines are going to perform in that price environment without having to take our reserves from 1,500 down to 1,200. We've gone through that exercise. We've been working on that basis for the past three years.

So, I think we're reasonably well positioned, but we've ensure that we've applied this fully loading of costs across all of our mines. And it's an interesting debate because when you go to your Board and you have the discussion about using $1,200 and the gold prices of 1,700 bucks and you tell them about fully loading and they ask you what's everybody else in the space doing and how come the reserves are coming down as a result.

We sit there and we reinforce it. Look, we have to operate in this price environment. We have to really be focused on controlling our costs and controlling the things that we can do. And what followed is that, the number that we're going to report as reserves is going to be lower because of the decisions that we're making then so be it. But we're in the business to actually control the things that we can do. So that's how we're looking at it right now.

And we haven’t had an Investor Day at this point, but we're certainly planning to put one together soon. And I think we'll talk a lot about reserves and how we're looking at costing our reserves so that investors can get an appreciation for how we're looking at it.

Alec Kodatsky - CIBC World Markets

Okay. Well, that does it for the time. Thank you very much, Tony. I appreciate it.

Tony Giardini

Thank you. Thanks very much.

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