Eldorado Gold's (EGO) CEO Paul Wright on Q2 2014 Results - Earnings Call Transcript

Aug. 1.14 | About: Eldorado Gold (EGO)

Eldorado Gold Corporation (NYSE:EGO)

Q2 2014 Earnings Conference Call

August 1, 2014 11:30 AM ET

Executives

Paul Wright – CEO

Norm Pitcher – President

Fabiana Chubbs – CFO

Paul Skayman – COO

Analysts

John Bridges – JPMorgan

David Barilla – JP Morgan

Andrew Quail – Goldman Sachs

Dan Rowlands – RBC Capital Markets

Patrick Chidley – HSBC

David Haughton – BMO Capital Markets

Kerry Smith – Haywood Securities

Operator

Good morning, ladies and gentlemen. Welcome to the Eldorado Gold Corporation Second Quarter 2014 Financial Results Conference Call. I would now like to turn the meeting over to Paul Wright, Chief Executive Officer. Please go ahead Mr. Wright.

Paul Wright

Good morning and thank you for joining us and welcome to our second quarter financial and operating results call. Joining me here today are Norm Pitcher, President; Fabiana Chubbs, Chief Financial Officer; Paul Skayman, Chief Operating Officer; and Krista Muhr, our Vice President of Investor Relations. As always we have provided detailed, financial and operational information in today’s press release.

Before I begin I need to remind you that any projections and objectives included in our discussion today are likely to involve risks which are detailed in our 2014 AIF and in the forward-looking statement disclaimer at the end of the news release. We will follow the usual format with myself providing some general comments on the company’s business and our results and release. Norm will then provide some operational detail followed by a brief walk through the financial statements led by Fabby and we will then open up for questions.

First of all, I’d like to extend my appreciation to all of our Eldorado teams who have again contributed to another solid performance for the company. Operationally another strong quarter with 200,551 ounces produced, all-in sustaining costs remained low at $829 an ounce and cash costs well in the bottom quartile of $489 an ounce.

The strong performance at mid-year and our positive outlook for the year has resulted in improved guidance for 2014. With total production now target at 790,000 ounces, cash costs of $495 an ounce and all-in sustaining costs targeted at $850 an ounce. Year-end projections for capital spend that is sustaining a growth capital, CS about 15% under original guidance at approximately $435 million versus the original budgeted $515 million.

Turning to our three permit watches and we will start with Turkey. At Kisladag, we received in the quarter EIA approval to expand the mine up to a production rate annually of 35 million tonnes. And as you have seen now we’ve obtained approval from our Board to reactivate the expansion and we will be proceeding with a planned expansion to 20 million tonnes with a target competition date of mid-2016.

Additional capital to complete the expansion will be approximately $90 million. We will in September incorporate in our corporate presentation, additional information relating to the details of this expansion and resultant operational performance. So the information that I know you analysts would like to have today and I am afraid you have to bear with us until we’re able to put it into a format and release to you in early September.

In China good progress is being made on the Eastern Dragon project with a competition of the new EIA we’re now in the process of submitting that document to central government authorities.

In Greece, we unfortunately remained stalled in relation to our outstanding EIA approval for the Perama Hill project. Subsequent to the municipal and European elections, we have engaged the government at ministerial level on this topic and unfortunately I am not in a position to provide a clear timeline for this approval.

You will notice in our outlook our stated intention to examine the possibility of enlisting on the Hong Kong exchange for our Chinese assets. Preliminary investigation has suggested this avenue may provide an opportunity for enhanced value for the Eldorado shareholders.

I just want to comment and clarify because there were some comments that we made initially this morning that would suggest that we are looking at an alternative listing or an additional listing for Eldorado, this is not the case, the examination is solely on the basis of considering the pending our Chinese assets into a new listed company.

And with that I’ll hand over to Norm.

Norm Pitcher

Thanks, Paul and good morning everyone. Again to part from my usual routine of going through mine by mine and giving commentary on each operation. To be honest it was a very straight forward quarter and I believe that the numbers speak for themselves. There really weren’t any operational issues at any of the mines but of course Paul Skayman and myself will be happy to answer any of your questions at the end of the call.

Production wise 200,551 ounces at a cash operating cost of $49 per ounce was an excellent quarter and has allowed us to peg our outlook for the year and at the high end of the ounce range and a low end of the cost range.

I would like provide some more information regarding what’s involved in the Kisladag expansion. We looked at three different production scenarios, one was keeping it as it is at 12.5 million tonnes of crusher throughput, we have looked at 17 million tonnes per annum crusher throughput and also 20 million.

The 20 million tonnes per annum gave us the best utilization of existing equipment purchased on the previous expansion and also the best production profile on a yearly basis. A large part of the expansion is of course on the crushing, screening and conveying side.

Currently we run a primary crusher, one secondary and five tertiary crushers. The 20 million tonne per annum expansion circuit has a new primary crusher, two secondary crushers and seven tertiary crushers. Of these 10 crushers all of them are either in the existing circuit or have been purchased.

We’re also replacing over the course of our stockpile and we are upgrading the 42-inch overline conveyer with a 48-inch unit and expanding ADR capacity. Installation of the components described make up the bulk of the capital for the project. Following detailed engineering, construction will begin in 2015 and be completed in 2016.

While we are on the subject of Kisladag let’s talk everyone’s favorite subject which is run of mine ore. We had originally in 2014 budgeted our usual 12.5 million tonnes of crushed ore and above 5 million tonnes run of mine ore. Of this run of ore about half was oxide and half was sulfide. In the past, we’ve put run of oxide on the pad, we get good recovery, we will continue to do so that’s not a question.

It’s really the sulfide run of mine and when we were getting a little bit delayed on the EIA so with the expanded rate we decided to cut back on run of mine production. We are now able to put it back on the pad but what we are looking out for this year the 12.5 million of crushed material and probably about 3 million tonnes run of mine which is again not 3 million tonnes, about half of oxide and half sulfide.

I would view the sulfide as almost sort of a test pad at this time and in the expansion study, we haven’t considered sulfide run of mine. There will be some oxide run of mine put on but it is, there is not oxide material left. So, there you are with run of mine

At Efemcukuru, we plan to do a modest expansion of plant capacity to bring the plant to 5,000 tonnes per annum. After reviewing the mine plan and associated grade profile, we expect production to continue to be at the 100,000 to 110,000 ounce per year range.

On Eastern Dragon as Paul mentioned, the new EIA has been completed and will now be submitted to the Minister for Environmental Protection in Beijing and we are looking at somewhere to three month review period by them.

On the exploration side, during Q2 we drilled in Greece, Brazil and China there was no exploration drilling in Turkey or Romania during the quarter. Our results for most of the programs are pending however, we do have some interesting results from so-called donation drilling at Olympias that wasn’t successful in condemning anything in an area outside of the current resource, significant results there include 5 meters at 10.8 grams per tonne gold and 86 silver 13 meters of 7.5 gram gold and 67 silver and 30 meters of 6.2 grams per tonne gold and 55 grams per tonne per silver.

With that I will turn it over to Fabby.

Fabiana Chubbs

Thank you, Norm. Good morning everyone. I will now go through the financial statement highlighting changes in significant accounts. Commencing with the balance sheet, the most significant changes from the December 31, 2013 balance sheet relates to the accounted for the acquisition of Glory Resources and a statistic agreement we enter with CDH in relation with our Eastern Dragon project.

Both constructions were completed in the first quarter of this year. This resulted in $10 million decrease in the investment in associated balance, an increase of $45 million in property, plant and equipment, and a net increase in liabilities and equity of $4 million.

The balance of the changes related to our normal course of business including a reduction of $11 million in the inventory balance, represented a reduction of gold in sequent inventories build up at year end at our Chinese operations. And an increase of $10 million in the deferred income tax liability balance mainly related to higher withholding tax accruals on dividends from our Turkish and Chinese subsidiaries.

Moving on to the income statement, we reported a net profit of 37.6 million or $0.05 per share for this quarter, compared with 43.3 million or $0.06 per share in the second quarter of 2013.

Revenues for the quarter of 265 million were 1% lower than a year ago our higher gold sales volumes were partially offset by lower gold prices. The 24% increase on depreciation and amortization of the second quarter of 2013 was a result of higher sales volumes.

Looking at income tax expense, the effective tax rate for the quarter was 39% compared to a rate of 36% for the second quarter of 2013. The effective tax rate for the second quarter of 2013 was lower due to a tax recovery related to recognition on investment tax credits in Turkey, partially offset by the impact of movements in the Turkish lira.

The effective tax rate for the second quarter of 2014 was higher due to higher withholding tax accruals on dividend from our Turkish and Chinese subsidiaries.

On the statement of cash flows, we ended the quarter with cash, cash equivalents and term deposits balance of 581 million compared to 624 million at the end of 2013. During the quarter, we generated cash flow from operating activities before changes in non-working capital of 92 million compared to 85 million in the second quarter of 2013.

The main uses of our cash during the quarter relates to capital program which has been 109 million. Those are my comments on the financial statement. I will turn the call back to Paul.

Paul Wright

Thanks Fabby, thanks Norm. Operator we’ll open up for questions please.

Question-And-Answer Session

Operator

Thank you. (Operator Instructions). And the first question is from John Bridges from JPMorgan. Please go ahead.

John Bridges – JPMorgan:

Good morning Paul, everybody congratulations on the results. I just wondered a small thing but I see you are building a road at Tocantinzinho in Brazil and I just wondered if that meant that the project is up and running again what? Is that a meaningful rake away or is it just housekeeping?

Paul Wright

No, look we haven’t obviously made any decisions on Tocantinzinho in terms of the project development, we are working now to finalize the technical study here in the coming months but what we have done is, you know we are doing some additional exploration around Tocantinzinho and you know we elected to essentially push through a call it a bush tracker or four-wheel drive along with the would be the permit road. It was something that will enabled us to have a better handle on what the costs would be to build a final road and also it reduces the cost significantly in terms of supporting the ongoing exploration.

John Bridges – JPMorgan

Okay. So, does that mean that you are looking at this more favorable than before or just all the same?

Paul Wright

Yeah look I think we are done yet on Tocantinzinho, I mean without getting into specifics there are elements as we you know dig deeper into examine the project which will probably is somewhat more encouraging that perhaps we were a year ago. But you know John, you have to sort of wait until we wrap up you know the definitive technical study which hopefully we’ll have done in certainly by October, November time.

John Bridges – JPMorgan

Okay. Olympias – that you weren’t able to – that ground but do you then have a ground shortage or have gone to other areas you can get to?

Paul Wright

No, this is really – if you sort of recall Olympias there is an East ore zone and West ore zone and we were driving a ramp towards called the east ramp over towards the East ore zone and sort of drilling ahead of it to see what was there and this material actually came in underneath where that ramp is going so, it’s fine and then probably its either in that trough between those two ore zones or it is the extension of the upper part of the East zone.

Norm Pitcher

It doesn’t affect anything on service John, it is more just in terms of location of the…

Paul Wright

And it doesn’t really affect our access in underground either.

John Bridges – JPMorgan

It is all good news, excellent, well done thanks guys

Operator

Thank you. The next question is from David Barilla from JP Morgan. Please go ahead.

David Barilla – JP Morgan

Hi guys. Just one question the low CapEx for this year, lower CapEx guidance. Why – well it is actually more, is it more related to a deferral or is that a lower quantum?

Paul Wright

It is more of a deferral, it just reflects the – and it is not unusual in terms of our performance. Every year we tend to probably be a little bit more aggressive in terms of our rate of spend on projects. But the cost is still out there, it will just be incurred later.

David Barilla – JP Morgan

Great thanks.

Operator

Thank you. The next question is from Andrew Quail from Goldman Sachs. Please go ahead.

Andrew Quail – Goldman Sachs

Good morning Paul. Congratulations on a very good quarter and some good news around some of these projects. Just a question on Kisladag, I think we are talking about half oxide, half sulfide at the end of the year. Grade was obviously very strong this quarter. Can you give just some color where you think that is going to be in the sort of second half and may be if you can into 2015?

Paul Wright

Look first of all just to clarify, what Norm talked and I’ll let norm sort of answer the bulk of the question. But I would weigh it in here. When we talk about half oxide, half sulfide that only relates to the very small run of mine component. The majority of the material – majority of the material that goes through the crushing circuit is sulfide and has been for a number of years. So to balance that question Norm will answer.

Norm Pitcher

Yeah I mean the good grades will continue probably through Q3 and then as the weather gets a little rougher, we drop the grade in Q4 and mine higher portions of the pit.

Paul Wright

We are going to end up pretty close to budget Andrew.

Norm Pitcher

Yeah.

Paul Wright

Very close.

Andrew Quail – Goldman Sachs

And then obviously, last thing I was curious, my last question. Is that deferral, is that sort of more we see that going to sort of ‘15 or is it sort of getting pushed out to sort of more ‘16 that 80.

Paul Wright

It will be spread over the two in reality. We are probably a month or two now from ramping up significantly on the man power.

Andrew Quail – Goldman Sachs

Okay.

Paul Wright

We are running right now at around a little over 500 people. We are projecting by year end to be in excess of 850 people. And so once we are in to that then rate of spend goes up significantly. We are getting set now to bring the mills to site to start setting the mills and once we get in to that mode then you are going to see the spend rate going up.

Andrew Quail – Goldman Sachs

Great. Thanks very much guys.

Operator

Thank you. The next question is from Dan Rowlands from RBC Capital Markets. Please go ahead.

Dan Rowlands – RBC Capital Markets

Yeah. Thanks very much. Norm I was wondering if you could provide a little bit of color on the success you have had especially at Jinfeng and White Mountain and getting the cost down in keeping those costs fairly low. Have there been some step wide changes there? Is this a function of greater or is there more going on there?

Norm Pitcher

No I mean part of it certainly in the case of White Mountain part of it is great and it will come down a little bit in the second half on grade to about what we predicated for the year. But I think in general at all of our operations, the guys were given a pretty clear mandate at the start to try to get their cost down and I think that our teams in China have done a particularly good job of doing that.

So I don’t think you can put your finger on one particular thing, just going through the entire mining, milling, processing-type functions and try to reduce and do things a little bit better everywhere, I mean we run a pretty lean shift to start with. So it’s pretty good that they could do what they have done.

Dan Rowlands – RBC Capital Markets

Yeah for sure. I know Paul you mentioned that we’d be getting an update in September. I’ll try one question. The current reserves for Kisladag, do they include run of mine ore?

Paul Wright

The reserves, yeah, they do. Yes.

Dan Rowlands – RBC Capital Markets

Okay, okay. Thanks.

Operator

Thank you. The next question is from Patrick Chidley from HSBC. Please go ahead.

Patrick Chidley – HSBC

Yeah hi Paul, everybody.

Paul Wright

Hi Patrick.

Patrick Chidley – HSBC

Just a question Jinfeng, just a little bit more detail there in terms of what’s the current underground open pit split on that?

Paul Wright

Just bear with us Paul Skayman is here.

Patrick Chidley – HSBC

Okay. Follow-up question then, the grade at Jinfeng. What sort of grade are you forecasting for the rest of the year?

Paul Skayman

It drops off a little bit for the rest of the year but not significantly. And I guess split is getting close to 50:50 for open pit underground.

Patrick Chidley – HSBC

Okay. Thanks. And just a final question on the Hong Kong listing for the Chinese assets, what stage are you at with respect to this would you just say? And if you can give some color on what sort of percentage would you be looking to list the sort of plan there?

Paul Wright

Look we can’t give you any color as it relates to percentage. Its early days. We’ve had I’ll say preliminary discussions with the exchange. We are going to following up here in the coming weeks in terms of having our people over there to extend those discussions.

We’ve certainly had some significant encouragement relating to the appetite for this type of vehicle that we present in Hong Kong I think clearly there has been some very strong signals from some very strong potential investors that are very high quality gold company with good corporate governance and transparency, would be extremely well received. But it’s very early days Patrick. It’s a process and we just have to just sort of go our way forward here.

Patrick Chidley – HSBC

Okay. Thanks. It’s great initiative by the way. Thanks very much and congratulations on the quarter.

Paul Wright

Thank you.

Operator

Thank you. The next question is from David Haughton from BMO Nesbitt Burns. Please go ahead.

David Haughton – BMO Capital Markets

Yes. Good morning Paul, Norm. Thank you for the update. Norm probably for you, back when the idea of a 35 million tonne per annum expansion at Kisladag was considered there was the idea of the pit ultimately taking some of your infrastructure. Now that you are stepping down to the 20 million tonnes does that occur or is it just a smaller footprint?

Norm Pitcher

It occurs to a much smaller extent. When we move the primary crusher anyway, so that does get moved in terms of sort of office buildings they don’t (inaudible) . But it takes out less than what the big pit did for sure.

David Haughton – BMO Capital Markets

Okay. And if I understand your commentary, the reasons that you’ve got just only the $90 million spend here is that most of that crushing combination at the front end is done and that the 90 is just really for the conveyor in the ADR, is that correct?

Paul Wright

No. But it’s also installation. Like there is a lot of concrete and structural steel going in to the – and moving to primary crusher. The whole circuit gets moved over to the east I guess. So lot of it is installation and then it’s ADR and then yes it’s over like it there.

Norm Pitcher

Most of the hardware is there David. It’s the installation cost that we are talking about.

David Haughton – BMO Capital Markets

Okay. What about the fleet that’s already as well?

Paul Wright

Yes. Fleet is good. Yeah. You don’t get buy anywhere.

David Haughton – BMO Capital Markets

And that’s what the electrification option?

Paul Wright

No. we have electrified the shovels and the drill. At the moment, we are still running the trucks on diesel. That’s something we need to do some more work on to find ways forward on electrifying the trucks for the longer deeper holes.

David Haughton – BMO Capital Markets

All right. Well, thank you very much. Look forward to the additional details later in the year.

Paul Wright

Thanks David.

Operator

(Operator Instructions). And the next question is from Kerry Smith from Haywood Securities. Please go ahead.

Kerry Smith – Haywood Securities

Thanks operator. Paul, you didn’t say anything on the MD&A about Olympias on the drift, I am just wondering how all that’s coming along?

Paul Wright

Sorry. Say that again Kerry.

Kerry Smith – Haywood Securities

Just the drift that you are driving over to Olympias from the one side to the other from…

Paul Wright

No, it’s back advancing. As you know we went through a process of having a lot of water which stalled us for a while and then we came up with the methodology to be able to advance under drought cover. We are doing that. I think it’s safe to say that we are not overwhelmed with the rate of progress right now. The progress is being fairly slow and as result fairly expensive. And we are shutting down for a couple of weeks here in the summer time and we may frankly extend that and have a bit of a think frankly as to how we may improve where we are, how we can improve upon that performance.

Water continues to – present and as you appreciate Kerry if you are developing under drought cover it effects your advancement and your cost so. And the reality is unfortunately because of the location, it’s very difficult for us to get good information as to how long we are going to be in this water condition.

So one of the things that we will be looking to do is to put some long holes out ahead during the shutdown to try to get a better handle as to what conditions are and may be make some changes to improve upon the situation.

Kerry Smith – Haywood Securities

All right. So do you have any thoughts as to the timing to actually finish that tunnel? I mean is it going to be six months longer than you thought or just rough order of magnitude.

Paul Wright

It’s going to be longer. How much longer, I think remains to be seen. And I think the fact that it is going longer is also prompting us to sort of reassess really phase 2 of Olympias and whether or not we should actually look at making phase 2 a little bit larger so that we can get higher production earlier out of phase 2 rather than just wait till phase 3.

Kerry Smith – Haywood Securities

And would you be able to give us a sort of a more detailed update on your thought process for that project? Sometime this year or is that going to be a next year event?

Paul Wright

Yes. We will. Certainly by the end of the year, we’ll have a much clear view on that what phase 2 will looks like, what phase 3 will look like in terms of the timeline.

Kerry Smith – Haywood Securities

Okay. And then just on the Hong Kong listing I must have sort of read it too quickly because I thought it was suggesting you were going to list your shares in Hong Kong and I see it now it’s relatively clear. So I apologize for that. But are you, conceptually are you thinking that you would maintain some level of ownership in that company or you think you are spinning the whole entity in to a new standalone company?

Paul Wright

It’s all about what the value proposition is Kerry.

Kerry Smith – Haywood Securities

Okay. So there has been no decision made either way as to how you might do so.

Paul Wright

Not at all.

Kerry Smith – Haywood Securities

Okay. And then the time, do you have any internal timeline to when you actually make decision, is that this year event or next year’s event?

Paul Wright

Well the process is typically a nine to 12 month process for the listing and we are sort of entering the process now. And it is a process and as we deal our way forward and make decisions that are material, we’ll of course let you know. But that’s the timeline for the Hong Kong listing.

Kerry Smith – Haywood Securities

Right okay so you’d make a decision before that point in time, but it would be nine to 12 months to actually get you through it if you decided to go in for listing if I understand you correctly?

Paul Wright

That’s correct.

Kerry Smith – Haywood Securities

Okay and then just last question on the 20 million tonne expansion at Kisladag you mentioned that the average production for the first five years was 325,000 ounces, right now you are running at almost 300,000 ounce a year run rate, so how does the math work when you are basically increasing your tonnes by 60% but the production is only going up by 15% or 20% what am I missing?

Paul Wright

Well you’re missing the fact that we have been for a while mining above the reserve grade Kerry.

Kerry Smith – Haywood Securities

Okay at reserve grade that’s – okay so are you expecting that you would be back to reserve grade once that expansion starts, is that the expectation?

Paul Wright

Well if you run for a number of years above the reserve grades, you’re going to run for a number of years below the reserve grade and you’re going to have some years at reserve grade.

Kerry Smith – Haywood Securities

All right okay I guess that’s good thanks very much.

Operator

Thank you. There are no further questions registered at this time, I’d like to turn the meeting back over to Mr. Wright

Paul Wright

Thank you operator and thank you everybody who joined us today and enjoy your weekend and look forward to talk to you next quarter.

Operator

Thank you. The conference has now ended. Please disconnect your lines at this time. And thank you for your participation.

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