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

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 |  About: Eldorado Gold Corporation (ELDXF)
by: SA Transcripts

Eldorado Gold Corporation (OTCQB:ELDXF) Q2 2014 Earnings Conference Call August 1, 2014 11:30 AM ET

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 Mr. Paul Wright, Chief Executive Officer. Please go ahead Mr. Wright.

Paul N. Wright

Good morning and thank you for joining us. Welcome to our second quarter financial and operating results call. Joining me here today are Norman 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 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 Statements 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 walkthrough the financial statements led by Fabi. And then we will 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 2,551,000 ounces produced, all-in sustaining cost remain low at $829 an ounce and cash cost well in the bottom quartile at $489 an ounce.

The strong performance at mid year and our positive outlook for the year has resulted in improved for 2014 with total production now targeted 790 ounces, cash costs of $495 an ounce and all-in sustaining cost targeted at $850 an ounce. The year end projection for capital spends that is sustaining and growth capital; see us about 15% under our original guidance at approximately $435 million versus original budget at $515 million.

Turning to our three permit watches, and we’ll 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 have obtained approval form our Board to reactivate the expansion and we will be proceeding with a planned expansion to 20 million tonnes with a target completion date of mid 2016.

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

Ensuring a good progress is being made on the Eastern Dragon projects with a completion of the new EIA, we are now in the process of submitting that document to central government authorities. In Greece, we unfortunately remain 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 are not in a position to provide a clear time line 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 investigations have 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 commentary 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.

Norman S. Pitcher

Thanks Paul, good morning everyone. I'm going to depart from my usual routine of going through mine-by-mine and giving commentary on each operation. To be honest, it was a very straightforward 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 would be happy to answer any of your questions at the end of the call.

Production wise 2,551,000 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 the low end of the cost range. I would like to provide some more information regarding what is 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 look to 17 million tonnes per annum of crusher throughput and also 20 million. The 20 million tonne per annum gave us the best utilization of existing equipment for purchase to 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 exiting circuit or have been purchased.

We are also replacing the course or stockpile and we are upgrading the 42-inch overland conveyor 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 it would be completed in 2016.

While we are on he subject of Kisladag, lets talk everyone’s favorite subjects which is run-of-mine, run-of-mine ore. We had originally in 2014 budgeted our usual 12.5 million tonnes of crushed ore and about 5 million tonnes run-of-mine ore. Of this run-of-mine ore about half was oxide and half was sulfide.

In the past we have put run-of-mine oxide on the pad, we got good recovery, we will continue to do so that’s not a question. Its really the sulfide run-of-mine and when we were getting a little bit delayed on the EIA so with the expanded rig we decided to cut back on run-of-mine production.

We’re now able to put it back on the pad, but what we are looking at for this year is the 12.5 million tonnes of crushed material and probably about 3 million tonnes of run-of-mine which is again that 3 million will be about half oxide and half sulfide.

I would view the sulfide as almost sort of a big test pit or 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 there is not a lot of oxide material left. So there you are with run-of-mine.

At Efemcukuru we plan to do a modest expansion to 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 in the 100,000 to 110,000 ounce per year range.

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

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

With that I’ll turn it over to Fabi.

Fabiana E. Chubbs

Thank you Norm. Good morning everyone. I will go through the financial statements highlighting changes in significant accounts. Commencing with the balance sheet, the most significant changes from the December 31, 2013, balance sheet related to the account for the acquisition of Glory resource and the strategic agreement we entered with CDH in relation with our Eastern Dragon project, both transactions were completed in the first quarter of this year.

This resulted in $10 million decrease in investment in associate balance, an increase of $45 million in property planning 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 insert with inventory build up at ELM at our Chinese operations and an increase of $10 million in the differed income tax viability balance, mainly related to higher withholding tax accruals on dividends form 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 as higher gold sales volumes were partially offset by lower gold prices. The 24% increase on the precision and amortization over the second quarter of 2013 was a result of higher sales volumes.

Looking at the income tax expense, the effective tax rate for the quarter was 39% compared to a rate of 36% for the second quarter of 2013. Effective tax rate for the second quarter of 2013 was lower due to a tax recovery related to recognition on impairment tax credit in Turkey partially offset by the impact of movements in the Turkish lira. Effective tax rate for the second quarter of 2014 was higher due to higher withholding tax accruals on dividends from our Turkish and Chinese subsidiaries.

On the statement of cash flow, we ended the quarter with cash, cash equivalents term deposit balance of $581 million compared to $624 million at the end of 2013. During the quarter we generated cash flow from operating activities before chase 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 related to our capital program which was $109 million. Those are my comments on the financial statements.

I will turn the call back to Paul.

Paul N. Wright

Thanks, Fabi. Thanks, Norm. Operator, we'll open 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 Chase & Co.

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

Paul N. Wright

Look, we obviously haven't made any decisions on Tocantinzinho in terms of the project development. We're working now to finalize the technical study here in the coming months, but what we have done is – we are doing some additional exploration around Tocantinzinho and we elected to essentially push through I'll call it a bush track or a four-wheel drive along what would be the permanent road. It was something that enabled us to have a better handle on what the cost would be to build a final road and also it reduces the cost significantly in terms of supporting the ongoing exploration.

John Bridges – JPMorgan Chase & Co.

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

Paul N. Wright

Look I think we are – we are not done yet on Tocantinzinho. Without getting into specifics, there are elements as we dug deeper into examining the project, which we're probably somewhat more encouraging than perhaps we were a year ago but, John, I think you have to sort of wait until we wrap up the definitive technical study which hopefully we'll have done here – certainly by October, November time.

John Bridges – JPMorgan Chase & Co.

Okay. Olympias, sorry that you weren't able to condemn that ground, but did you then have a ground shortage or have you got other areas you can go to?

Norman S. Pitcher

No, this is really – if you sort of recall Olympias, there's an east ore zone and a west ore zone and we were driving a ramp, called 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 it's probably – it's either in that trough between the two ore zones or it's an extension of the upper part of the East Zone.

Paul J. Skayman

It doesn’t affect anything on surface, John. It's more just in terms of location of…

Norman S. Pitcher

Doesn’t affect me, doesn’t really affect we’re putting our access in underground either.

John Bridges – JPMorgan Chase & Co.

It's all good news. Excellent, well done, thanks, guys.

Norman S. Pitcher

Yes, John. Thank you.

Operator

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

David Barilla – JPMorgan & Co.

Hi, guys just one question. The lower CapEx for this year – lower CapEx guidance. Why – well, it's actually more. Is it that more related to a deferral or a lower quantum?

Paul J. Skayman

It's more of a deferral. It just reflects the – and its not unusual in terms of our performance like every year we tend to probably be a little bit more aggressive in terms of our rate to spend on projects, but the cost is still out there. It'll just be incurred later.

David Barilla – JPMorgan & Co.

Great. Thanks.

Operator

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

Andrew C Quail – Goldman Sachs & Co.

Good morning Paul and Skayman, congratulations on a very good quarter and some good news around some of these projects. Just a question on Kisladag, I think we're 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 on where you think that is going to be this sort of second half and maybe if you can into 2015?

Paul J. Skayman

Now look, just first of all the clarify when Norm talk and let Norm’s answer bulk of the question, but I would have weighted in here. When we talk about half oxide and half sulfide, that only relates to the very small run of mine component. The majority of the material that is vast, majority of the material that goes through the crushing circuit is sulfide and has been for a number of years. So the balance of the question yourself Norm or Paul answer.

Norman S. Pitcher

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 J. Skayman

We're going to end up pretty close to budget.

Norman S. Pitcher

Yes.

Paul J. Skayman

Yes, very close.

Andrew C Quail – Goldman Sachs & Co.

Okay. And then obviously last thing, I was curious about but last question, is that deferral, is that sort of more we see that going into 2015 or is it sort getting pushed out to more 2016, that sort of [indiscernible]?

Paul J. Skayman

It will spread over the two in reality. We're probably a month or two now from ramping up significantly on the manpower.

Andrew C Quail – Goldman Sachs & Co.

Okay.

Paul J. Skayman

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

Andrew C Quail – Goldman Sachs & Co.

Got. Thanks very much guys.

Operator

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

Dan Rollins – RBC Capital Markets

Yes, thanks very much. Norm, I was wondering if you could provide a little bit of color on the success you've had at especially Jinfeng and White Mountain and getting the costs down and keeping those costs fairly low? What - has there been some stepwise changes there? Is this a function of grade or is there more going on there?

Norman S. Pitcher

In part of it – certainly in the case of White Mountain part of it's grade and we will come down a little in the second half on grade to about what we predicted for the year, but I think in general at all of our operations the guys were given a pretty clear mandate of the start to try to get their costs 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. They've gone through the entire mining, milling, processing type function and try to reduce and do things a little bit better everywhere. We run a pretty lean ship to start with, so it's pretty good that they could do what they've done.

Dan Rollins – RBC Capital Markets

For sure. I know, Paul, you mentioned that we’ll be getting an update in September. I'll try one question.

Paul N. Wright

[Indiscernible].

Dan Rollins – RBC Capital Markets

The current reserves for Kisladag, do they include run of mine ore?

Paul N. Wright

The reserves – they do yes.

Dan Rollins – RBC Capital Markets

Okay thanks.

Operator

The next question is from

Patrick Chidley – HSBC Securities Inc.

Hi, Paul everybody.

Paul N. Wright

Hi, Patrick.

Patrick Chidley – HSBC Securities Inc.

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

Paul J. Skayman

Because there was – Paul Skayman here…

Patrick Chidley – HSBC Securities Inc.

Okay. Followup question, grade at Jinfeng, what sort of grade are you forecasting for the rest of the year?

Paul J. Skayman

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 Securities Inc.

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 say? And if you can get some color on what sort of percentage would you be looking to list on the plan there?

Paul J. Skayman

Look, we can't really give you any color as it relates to percentages. It's early days, we've had I would say preliminary discussions with the exchange. We're going to be 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 type of vehicle that this would represent in Hong Kong. I mean I think clearly we've seen 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 sort of peel our way forward here.

Patrick Chidley – HSBC Securities Inc.

Okay, thanks. Great initiative by the way. Thanks very much and congratulations on the quarter.

Paul J. Skayman

Thanks.

Operator

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

David Haughton – BMO Nesbitt Burns

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

Norman S. Pitcher

It occurs to a much smaller extent. The – we moved the primary crusher anyway, so that does get moved. In terms of office buildings, they don’t. Truck shop, partly, yes – but it takes out less than what the big pit did for sure.

David Haughton – BMO Nesbitt Burns

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

Norman S. Pitcher

No, it's also installation. Like there's a lot of concrete and structural steel going into the –moving the primary crusher. The whole circuit gets moved over to the east, I guess. So, a lot of it's installation and then it's ADR and then, yes, it's overland conveyor.

Paul J. Skayman

Most of the hardware is there, David. It's the installation costs that we're talking about.

David Haughton – BMO Nesbitt Burns

Okay. And what about the fleet? That's already there as well?

Paul J. Skayman

Fleet's good. We don't get to buy anymore.

David Haughton – BMO Nesbitt Burns

And that's with the electrification option?

Paul J. Skayman

No. Electrified the shovels and the drills. At the moment, we're still running the trucks on diesel. That's something we need to do some more work on to move forward on electrifying the trucks for the longer holes – the deeper holes.

David Haughton – BMO Nesbitt Burns

All right. Thank you very much. Look forward to the additional details later in the year.

Paul N. Wright

Thank, David.

Operator

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

Kerry Smith – Haywood Securities Inc.

Thanks, operator. Paul, you didn't say anything in the MD&A about Olympias on the drift. I just wonder how all that's coming along.

Paul N. Wright

Sorry. Say that again, Kerry.

Kerry Smith – Haywood Securities Inc.

Just the drift that you're driving over to Olympias from the one side to the other from...

Paul N. Wright

No. It's back advancing. As you know, we've had – we went through a process of having a lot of water which stalled us for a while. Then we came up with a methodology to be able to advance under grout cover. We're doing that. I think it's safe to say that we're not overwhelmed with the rate of progress right now. The progress has been fairly slow and, as a result, fairly expensive. They're shutting down for a couple of weeks here in the summertime and we may, frankly, extend that and have a bit of a think, frankly, as to how we may improve what we are, how we can improve upon that performance.

Water continues to be present and as you appreciate, Kerry, if you're developing under grout cover, it affects your advance and your costs. The reality is unfortunately because of the location it's very difficult for us to get good information as to how we're going to be in this water condition, so one of the things that we'll 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 the conditions are and maybe make some changes to improve upon the situation.

Kerry Smith – Haywood Securities Inc.

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 like just rough order?

Paul N. Wright

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

Kerry Smith – Haywood Securities Inc.

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

Paul N. Wright

No. We will – certainly by the end of the year we'll have a much clearer view on what Phase II will look like, what Phase III will look like in terms of timeline.

Kerry Smith – Haywood Securities Inc.

Okay. And then just on the Hong Kong listing, I must admit I 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 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 are you thinking of spinning the whole entity into a new standalone company?

Paul N. Wright

It's all about what the value proposition is, Kerry.

Kerry Smith – Haywood Securities Inc.

Okay. So, there's been no decision made either way as to how you might do that.

Paul N. Wright

No. Not at all.

Kerry Smith – Haywood Securities Inc.

Okay, and then the time, do you have an internal timeline to when you'll actually make a decision? Is that a this year event or next year's event?

Paul N. Wright

The process is typically sort of a nine to 12 months process for the listing and we're sort of entering the process now and it is a process. And as we feel 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 Inc.

All 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 if you decided to go with the listing then if I understand you correctly?

Paul N. Wright

That’s correct.

Kerry Smith – Haywood Securities Inc.

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're running at almost 300,000 ounce a year run rate, so how does the math work when you're basically increasing your tonnes by 60% but the productions only going up by 15% or 20%, what am I missing?

Paul N. Wright

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

Kerry Smith – Haywood Securities Inc.

Okay. So, at reserve grade, that would – okay. Okay. So, are you expecting that you would be back to reserve grade once that expansion started then? Is that the expectation?

Paul N. Wright

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

Kerry Smith – Haywood Securities Inc.

All right, okay. Okay. I guess – that's good. Thank you very much.

Operator

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

Paul N. Wright

Thank you, Operator, and thank you everybody who's joined us today. And enjoy your and look forward to talking 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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