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Kinross Gold (NYSE:KGC)

Q1 2014 Earnings Call

May 08, 2014 7:45 am ET

Executives

Thomas Ballantyne Elliott - Vice-President of Investor Relations

J. Paul Rollinson - Chief Executive Officer and Non Independent Director

Tony Serafino Giardini - Chief Financial Officer, Principal Accounting Officer and Executive Vice-President

Brant E. Hinze - President and Chief Operating Officer

Analysts

David Haughton - BMO Capital Markets U.S.

Jorge M. Beristain - Deutsche Bank AG, Research Division

John Charles Tumazos - John Tumazos Very Independent Research, LLC

Greg Barnes - TD Securities Equity Research

Andrew C. Quail - Goldman Sachs Group Inc., Research Division

Operator

Thank you for standing by. This is the Chorus Call conference operator. Welcome to the Kinross Gold Corporation Q1 2014 Financial Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Tom Elliott, Vice President, Investor Relations. Please go ahead.

Thomas Ballantyne Elliott

Thank you, and good morning. With us today, we have Paul Rollinson, Chief Executive Officer; Brant Hinze, President and Chief Operating Officer; and Tony Giardini, Chief Financial Officer.

Before we begin, I'd like to bring to your attention the fact that we will be making forward-looking statements during this presentation. For a complete discussion of the risks, uncertainties and assumptions, which may lead to actual financial results or performance being different from estimates contained in our forward-looking information, please refer to Page 2 of this presentation, our news release dated May 7, 2014, our MD&A for 2013 and the period ended March 31, 2014, and our most recently filed AIF, all of which are available on our website.

I'll now turn the call over to Paul.

J. Paul Rollinson

Thanks, Tom, and thanks to everyone for joining us today. I'm very pleased to share with you another strong quarter of operational results. We are well on track to meeting our guidance for the year with solid production across all our operations. This quarter, in particular, stands out for the encouraging progress we are making in reducing cost, both on a consolidated basis and, notably, at some key mine sites. This is due to the determined efforts across the company to find savings, optimize operations and reduce costs. Our emphasis on continuous improvement and financial discipline is continuing to see results. I will speak more specifically to some of these cost reductions in a moment, as well Brant, but first, let me briefly review our quarterly results.

First quarter production was higher year-over-year at 665,000 ounces as production from our new Dvoinoye mine came fully onstream. This puts us solidly within our production guidance range of 2.5 million to 2.7 million ounces for the year. Our production cost of sales was $727 per ounce for the quarter, which is below our 2014 guidance of $730 to $780 per ounce. Our all-in sustaining cost also declined to approximately $1,000 per gold equivalent ounce sold. This continues the downward trend begun in 2012 when all-in -- all sustaining costs ended the year at just over $1,120 per ounce. This reflects, as I mentioned, successful cost reduction efforts across our operations. I would, however, like to highlight the progress we are making at 3 sites in particular: Chirano, Tasiast and Maricunga.

At Chirano, as at a number of our sites, we have been moving to replace contractors with self-performed mining and maintenance. The goal is to save money and enhance our own internal expertise, and it is definitely paying off at Chirano. It is the largest factor behind a 16% decrease in production cost of sales per ounce from the fourth quarter of 2013. In fact, production cost of sales at Chirano has been decreasing steadily over the last 4 quarters and the mine is now one of our lowest cost operations.

Our Tasiast operation also continues to improve. A year ago, we brought in the former General Manager at Fort Knox to head up our Tasiast operation. And under his leadership, we have seen steady progress. Tasiast had record production in 2013 and, again, this quarter. Production cost of sales per ounce decreased 9% from the fourth quarter as infrastructure improvements, including a new truck shop and power plant, have increased productivity and brought down costs.

The last operation I'd like to touch on is Maricunga. As you know, we've had some issues with Maricunga over the last few quarters, which impacted production and costs. We brought in a new team, including some Fort Knox veterans, who, together with our Brazilian team, significantly improved Paracatu's performance, and they are definitely having a positive impact. Better equipment availabilities and improved throughput, along with higher grade ore, have brought Maricunga's quarterly production back above the 50,000-ounce mark. At the same time, cost of sales per ounce declined 14% compared to Q4 and is now below where it was 1 year ago. These are very tangible improvements. We still have more work to do, but there is no question that things are moving in the right direction, not just at Maricunga, but at Tasiast and Chirano as well.

Of course, a major milestone in the quarter was the release of the Tasiast feasibility study. As we announced at the end of March, the results indicate a 38,000-tonne-per-day mill has the potential to significantly increase cash flow per share, enhance the company's production profile and lower costs. An expanded Tasiast is expected to be our largest and among our lowest-cost operations with average annual production of approximately 850,000 ounces and cash cost of $500 per ounce for the first 5 years. As we've said previously, we will not be making a final construction decision until 2015 at the earliest. In the meantime, we continue to focus on further improving project economics, derisking execution and exploring project financing options. We look forward to keeping you appraised of our progress.

Before concluding, I wanted to say a few words about Russia and the situation in the Ukraine. As you know, our operations in far eastern Russia are very far removed from the Ukraine and remain unaffected by recent developments. We are monitoring the situation closely and we'll continue to focus on managing potential risk as we do at all of our operations. In this regard, our primary responsibility is to our shareholders. I can't speculate on possible future scenarios and won't engage in any discussion about the political situation on the ground. However, I would say we have a long history in Russia. Dvoinoye is our fourth mine in the last 15 years, and our extensive experience and relationships have served us well.

In conclusion, I would like to reiterate that we remain solidly on track to meet our guidance this year, with strong operational performance at all of our mines in the first quarter. And while there's no question that a significantly lower gold price has impacted earnings, we are continuing to make important progress to reduce costs.

I'll now turn the call over to Tony for more on our Q1 financial results.

Tony Serafino Giardini

Thank you, Paul. We produced 665,000 gold equivalent ounces at a cost of sale of $727 and an all-in sustaining cost of approximately $1,000 per ounce. I'd like to point out that approximately 40,000 ounces were produced but not sold during the quarter due to timing of shipments, which could have had a further benefit to our quarterly all-in performance.

First quarter average realized gold price was $1,299 per ounce, which is down $325 from $1,624 in Q1 last year, but was better than the average PM Fix of $1,293 per ounce. First quarter adjusted operating cash flow was $239 million or $0.21 per share, 42% lower compared with Q1 2013. First quarter adjusted net earnings was $34 million or $0.03 per share, an 80% decline from the same quarter last year. As Paul indicated, despite another quarter of strong operating results, lower gold prices had a significant impact on our financial results, reducing margins, cash flow and earnings.

In keeping with our commitment to financial discipline, capital expenditures were $169 million, a 45% reduction from the same quarter last year. We continue to prioritize balance sheet strength and took action during the first quarter to increase our financial flexibility. In March, we completed a $500 million unsecured debt offering, consisting of 10-year bond at an interest rate of 5.95%, and we used the net proceed to repay $500 million of our term loan. This reduces our 2017 debt obligations by 50% and extends a significant portion of our debt maturity to 2024, and we have no material debt maturity until 2016. As at March 31, Kinross had a strong liquidity position of approximately $2.2 billion. This consists of $764 million in cash, cash equivalents and restricted cash; and $1.5 billion of available undrawn credit facilities. With a net debt position of $1.3 billion, our net debt-to-EBITDA ratio at March 31 was well within our debt covenant of 3.5:1. Our focus on disciplined capital management and the strength of our balance sheet will continue to be priorities going forward.

I'll now turn the call over to Brant.

Brant E. Hinze

Thank you, Tony. Overall, it was a strong quarter and a great start to the year. Our results continue to show the progress we've been making as we have focused on operational fundamentals and managing costs. I'm pleased to say that we are on track to meet our production and cost guidance at each of our operating regions and company-wide. A full site-by-site summary is available on Page 17 of yesterday's news release. I'd like to touch on some operational highlights.

Our Americas region performed well in the first quarter, producing 334,000 gold equivalent ounces at a cost of sales of $788 per ounce. Fort Knox production was lower compared with the previous quarter, primarily due to the expected winter slowdown from heap leach and slightly lower mill grades. Looking forward, the mine will be entering a phase of increased operating waste. As a result, we expect higher cost of sales at Fort Knox over the next 3 quarters.

At Paracatu, grades and recoveries declined from quarter 4, primarily as a result of grade variation in the B1 ores processed through Plant 1. However, the production and cost performance remained in line with the previous quarter.

Maricunga has continued to improve performance with increased production and lower costs in the first quarter compared with quarter 4, despite an 8-day strike, which impacted production. The team's success in improving operating performance and increasing efficiencies can be seen in a variety of factors, including the transition to self-perform for mobile maintenance, which improved productivity in the mobile fleet. Improved efficiencies in the ADR and crushing plants, enhanced leach pad management and a more efficient solution management schedule, all of which have resulted in improved production performance.

Our Russia region continues to deliver strong results, producing over 191,000 gold equivalent ounces at a cost of sales of $481 per ounce. The combined operation benefited from the first quarter of production from Dvoinoye, which contributed approximately 83,000 gold equivalent ounces compared with 24,000 ounces in Q4 2013.

West Africa performance was strong during the first quarter, producing 139,000 ounces at a cost of sales of $820 per ounce. We have begun to see the benefits of site infrastructure projects we have completed at Tasiast last year, including the new power plant, which replaced numerous costly generators; and the new truck shop that has increased maintenance efficiencies and fleet availabilities.

In quarter 1, Tasiast achieved record quarterly production, producing over 71,000 gold equivalent ounces, primarily as a result of higher grades and mill throughput. Tasiast also achieved a 9% improvement in cost of sales per ounce compared to quarter 4.

Chirano is a great example of the cost savings we are realizing from eliminating the use of expensive contractors and moving towards self-perform. The transition to self-perform mining was the main factor behind the 16% reduction in production cost of sales per ounce, which has improved from $733 per ounce in quarter 4 2013 to $616 per ounce in quarter 1 2014. Near the end of the quarter, the site experienced a trunnion failure at one of the 3 ball mills. Repairs are underway and are expected to be completed early in the third quarter. While we forecast slightly reduced production at Chirano in the second quarter, we do not expect any impact to West Africa's regional guidance.

To wrap up on operations, I would like to extend my gratitude to all our employees for their hard work and dedication to delivering results, while maintaining one of the best safety records in the industry.

I'll now turn the call back over to Paul.

J. Paul Rollinson

Thanks, Brant. As you can see from our results, we continue to deliver on the 4 core principles of The Kinross Way Forward: operational excellence, quality over quantity, disciplined capital allocation and balance sheet strength. Given the size of our operations, our competitive operating cost compared to our peers and our current trading multiples, we continue to believe Kinross offers a compelling value opportunity. Thank you.

Operator, I'd now like to open up the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] First question comes from David Haughton of BMO Capital Markets.

David Haughton - BMO Capital Markets U.S.

I've got a question, really for Tony, I guess. There are 2 aspects to it, both of which impact the P&L. The first one is the high effective tax rate and the reasons for that and what we can see going forward, and the other one would be in relation to when the unsold production could come into the revenue.

Tony Serafino Giardini

Sure. I can deal with both of those, and maybe I'll deal with the tax rate first. Our effective tax rate was approximately 54.3% during the quarter. And as you know, when we provided our guidance at the beginning of the year, we ran our numbers based on $1,200, and our guidance was $100 million of tax, plus an incremental rate of 24%, depending on changes to the gold price that would impact our earnings. So when we looked at the rate during the quarter, the impact is really an income mix, and it comes down to where we're getting our income from. And to the extent that we have some regions where we don't have any tax expense and we have others that perhaps contributed further earnings that would be taxable, it basically results in a somewhat higher tax rate. We haven't changed our guidance at this point. Our expectation is along the lines of what we had said earlier, and so nothing has changed and it's really just the mix in the income during the quarter, and we could certainly provide you with additional details. The best way of, obviously, looking at the effective tax rate is looking at what our statutory rates are in countries where we operate, and we can go through that in detail, if that's helpful, David. In regards to the second part of your question, you asked a question about gold sales in Russia -- excuse me, gold sales that hadn't been sold and primarily, it relates to inventory in Russia, which is subsequently being sold after quarter-end. So we had approximately 40,000 ounces that hadn't been sold, and those amounts have now been sold. If you factor that in, it probably would've resulted in about a $30 reduction in our all-in cost for the quarter, had we been able to sell those in the March quarter. But we weren't able to get them sold until April, and it's really just a timing issue in terms of getting the gold to the refinery and the outturn that we have, and it's normal course and very typical. But as I said, that gold has subsequently been sold.

David Haughton - BMO Capital Markets U.S.

Okay. So the guidance, Tony, can you just remind me, it's around about the 40% mark, wasn't it?

Tony Serafino Giardini

Pardon me, for the tax rate?

David Haughton - BMO Capital Markets U.S.

The tax, yes.

Tony Serafino Giardini

Well, we didn't give an effective rate simply because, as I said earlier, when you're running your budget at $1,200, it becomes a very high effective rate if you're using $1,200. So what we did was we indicated $100 million plus 24% incremental, depending on what ends up happening to gold prices during the course of the year. So the base that I would look at is, take that $100 million; if you assume $1,300 for the balance of the year and calculate out earnings on that additional incremental $100 change in the gold price, which I think we indicated was roughly $200 million impact. You would factor 24% of tax associated with that amount, $48 million or $148 million in terms of total tax expense against the earnings number.

Operator

The next question is from Jorge Beristain of Deutsche Bank.

Jorge M. Beristain - Deutsche Bank AG, Research Division

I guess my question is for Paul. And just in light of the recent M&A that we've seen in the sector, both accomplished and attempted, between some of your major competitors, if your thoughts were -- or your thought process was changing a little bit toward the possible completion of Tasiast Phase 2 on a stand-alone basis and if you were perhaps more interested now in doing a more collaborative type of joint venture or possibly bringing in a partner to finish up that project. So just wondering if there's any kind of change in the thinking given the kind of M&A we've seen percolating in the sector.

J. Paul Rollinson

Yes, I kind of look at the 2 a little bit differently, Jorge. I guess, to me, how we proceed with Tasiast is really almost a financing kind of question and whether or not we chose to have a partner for financial or strategic reasons is not top of mind for us right now. But as we've indicated, we are taking the rest of the year here to really take the time to get it right along a number of fronts. So we have had interest from time to time, but -- in partnering, but that's really not what's driving our agenda. We're focused, generally, as I see the M&A landscape out there, on our 4 corporate principles and -- as I articulated, and that's what we'll continue to do, stick to our operational excellence and balance sheet, capital discipline. That's -- that is our focus.

Operator

The next question is from John Tumazos of John Tumazos Very Independent Research.

John Charles Tumazos - John Tumazos Very Independent Research, LLC

The preceding question was the one I was going to ask, I'll pass.

Operator

The next question is from Greg Barnes of TD Securities.

Greg Barnes - TD Securities Equity Research

I guess it's for Brant. Can you talk a little bit about the lower recoveries at Paracatu and what happened in terms of the ore mix, I guess, that impacted your recoveries?

Brant E. Hinze

Sure, I can address that. What we are seeing from a recovery perspective is some variability that we're seeing in the B1 ores. As you will remember from our technical report that was just released, we did have B1 ores that carry us through 2017. So we're way -- we're reaching the end of the B1 ore, primarily. So we're way out on the fringes, and we're seeing some variability out there. We're doing some additional drill work out on the B1 ores currently, to try and understand if this is something that will persist with remaining B1 ores or not. As we look at it right now, it's about -- of our recovered remaining life-of-mine recovered ounces, the B1 ores are about roughly 7%. So right now, we're doing additional work out there, additional drilling, and we just don't have the information and the answers to that yet.

Greg Barnes - TD Securities Equity Research

Okay. As a follow-up question I have for Tony, any progress on the financing structure for Tasiast Phase 2?

Tony Serafino Giardini

Yes. We've started the process in terms of project finance. I would point out that we had previously engaged an adviser, and that's sort of gone pens down last year. They had done a fair amount of work already in terms of identifying potential lenders, looking at the structure, looking at the quantum of debt that we could raise at the project level. And so we've reengaged with that adviser now and had an initial kickoff meeting. And we're going to be meeting with the potential lenders later this month and then looking to get some indicative levels in terms of when -- a potential participation of lenders during July. And in fact, I should point out that, just going back to my earlier comment about engaging with the adviser, we'd actually engaged them in 2012. So things were very well advanced, and we're using -- the adviser that we're using had actually been involved with the project financing in Mauritania that was done in '08 or '09. So we remain confident that things will move forward quickly. The key points will be to identify potential lenders, obviously; to look at technical review that they will need to do with respect to the asset, which had progressed previously, looking at any environmental issues. But we would expect to report in the second quarter in terms of further progress on where we stand on the PF.

Greg Barnes - TD Securities Equity Research

And what quantum of debt are you looking at, Tony?

Tony Serafino Giardini

We really haven't -- we haven't focused on a specific number at this point. What we're going to actually focus on is going to be how much debt the project can hold at different price points because, Greg, as you can appreciate, what we would probably see is some stress testing at lower price levels, so we'll want to remain comfortable about that. And that will be one of the considerations. And then I think we'll have to look at it in a quantum of how much debt as a company we feel comfortable maintaining. But we think that the project is extremely robust and can support a reasonable level of debt. I would say that, ballparking it, we're probably looking at probably somewhere around 50% of the cumulative capital that we need to go into the project in terms of the maximum amount of debt that we would want to raise on a PF basis. But we'll just have to see where the interest comes in as we move forward on the project finance.

Operator

[Operator Instructions] The next question is from Andrew Quail of Goldman Sachs.

Andrew C. Quail - Goldman Sachs Group Inc., Research Division

Just got one question on Maricunga. Obviously, grade keeps on improving there sort of towards the reserve. Is that something we can -- we think will continue into sort of the second half of this year and even into next year?

Brant E. Hinze

Yes, Andrew. This is Brant. Yes, we certainly have seen improved grades from last quarter and last year in quarter 1 2014. And as you noted, the grade that we did experience in the first quarter is closer to reserve grade, and we would expect to see that for the remainder of the year.

Andrew C. Quail - Goldman Sachs Group Inc., Research Division

And is that -- I mean, that's obviously a key driver behind cost. But can you guys touch on other things that you've done there, sort of what -- in Chile, that's sort of turned that around sort of on the cost side operationally?

Brant E. Hinze

Yes. I can certainly address that as well, too. As we indicated in some of our opening comments, we have seen significant improvement in mobile fleet performance, and that is due in large part to the self-perform of our maintenance programs. As well, too, our leach pad loading schedules, our solution management schedules, our ADR performance is all improving. And then, of course, as well, too, we're seeing some lower reagent costs. And then in large part, we're seeing lower reagent costs as a result of better performance at the SART plant as well. So these guys are really knocking it out of the park, I would say. And we're pretty optimistic and hopeful they'll continue to do this and we'll continue to see both efficiency and cost performance going forward.

Operator

There are no more questions at this time. I'll now hand the call back over to Paul Rollinson for closing comments.

J. Paul Rollinson

Thank you, operator, and thank you, everyone, for your time today. And we look forward to hopefully catching up with you in person during the quarter. Thank you.

Operator

This concludes today's conference call. You may now disconnect your lines. Thank you for participating, and have a pleasant day.

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