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Executives

Andy Davidson - Head, Business Development and IR

Andrew Pardey - COO

Analysts

Brock Sailier - GMP Securities

Jonathan Guy - RBC Capital Markets

Alison Turner - Panmure Gordon

Vikas Choudhary - JPMorgan Chase

Cailey Barker - Numis Securities

Yen Voo - Nomura

Bart Jaworski - Davy

Alison Turner - Panmure Gordon

Centamin PLC (OTCPK:CELTF) Q2 2014 Earnings Conference Call August 14, 2014 4:00 AM ET

Operator

Good morning and welcome to the Centamin Interim Results Conference Call. Throughout the call, all participants will be in a listen-only mode and afterwards there will be a question-and-answer session. Just to remind you, this conference call is being recorded.

And today, I am pleased to present Andy Davidson and Andrew Pardey. Please begin your meeting.

Andy Davidson

Thank you very much. Good morning everybody. Thanks for joining us on the call. As the operator said Andrew Pardey our Chief Operating Officer with me. I’m just going to, as usual, just a very briefly run through to the highlights and then open up the call for questions and answers.

So the second quarter saw the first material production from the new Stage 4 expanded plant, and we have record throughput in the quarter of just under 2 million tonnes. As a consequence, that productivity level through the new plant, through the expanded plant, has continued, expected to continue to ramp up during the second half. And the key driver obviously therefore continued quarterly increases in production.

The second quarter saw a slightly lower average head grade, which resulted in gold production in the quarter of just over 81,000 ounces. So some slightly lower than expected grades were primarily resulted below forecast grades in the underground development ore and we can say that we are starting to see those grades return back to normal levels and we do expect those grades to continue to track up in the second half as well. And so good positives from the underground operation, and particularly there was the high mining rates. The operation continues to perform very well in the mining front productivity, set another record quarter.

And with those continued high mining rates and grades continuing to track up, together with the increasing plant throughput as a result of the going ramp up, means that we continue to expect increases in quarterly production through the remainder of the year and reiterate our guidance of 420,000 ounces for the full year and $700 an ounce operating cost.

Quarterly cash costs for the second quarter were about that $700 an ounce guidance level for the full year, the quarterly number was $783 an ounce. Those high costs were a reflection really as the same slightly lower production due to lower grades and now those costs should come back down into the line with the full year average or opening the full year average back into line guidance. So I should say, that the production continues to rise through the remainder of the year.

Cash flow generation, despite the challenges in the quarter, was strong. We had EBITDA of $32.6 million in cash from operations of just over $20 million. And this really indicates points towards our expectations of continued increases in free cash flow generation as production continues to ramp up. And the expansion CapEx, as we’re already seeing, continues to be great towards that steady state, sustaining CapEx guidance that we put in our presentation for some time now.

The balance sheet remains strong with $133 million of cash in liquid assets. And as a result of that, cash flow generation, going forward, in strong balance sheet, strong position and great profile, coming out of Stage 4 completing that program and ramping up production as we foreshadowed in our AGM in May. The Board has declared a made in dividend of $10 million, which equate to $0.87 a share. So, with those good cash flow earnings returns to shareholders and strong balance sheet, we also remain well placed to fund our ongoing growth programs. We have ongoing exploration projects in West Africa and Ethiopia, new project in Burkina Faso as well underway.

But to note, I think during the quarter on that front on the exploration front, in particular, I would highlight the exploration results from the drilling underground at Sukari, which are outlined in the table on page seven of the results. I think both supports our confidence in the medium and long-term growth of the reserve and the mine life resource drilling underground continues. So, we expect to see continued resource and reserve growth from underground in the coming years. And continue to expect both the underground operation to be a statue long-term operation for the mine as a whole.

But because of the court proceedings that are ongoing, no material updates on those procedural methods from the second quarter. In the second quarter, we did have a new law passed in Egypt in late April. We’ve mentioned this in a press release at the time. So that new law restricts the capacity for third-parties to challenge contracts between investors and the government. We believe that in due course Centamin will benefit from this new law and we continue to discuss with our advisors how that will be applied in our case.

And with that operator I think I’d like to just handover to questions please. Thank you.

Question-and-Answer Session

Operator

Thank you (Operator Instructions). Our first question comes from the line of Brock Sailier. Please go ahead with your question. Your line is now open.

Brock Sailier - GMP Securities

Good morning Andy. Just a quick one on the underlying dollar per tonne of rock cost, it seems like your underground mining and processing dropped quite substantially on per tonne rock basis. Tell me, how much of that was related to your sort of per quarter contribution from Stage 4 and how much of that is or you just driving cost out of the business? And I guess by extension, should we expect that dollar per tonne of rock to continue saving into the third and fourth quarter?

Andy Davidson

Good morning, Brock. Look I think, you are right, just like that. We did see dollar per tonne decrease, particularly in the processing. And that is the function of the ramp up as the increased efficiencies you get that is going from the higher rates of productivity. We expect to continue to do those kind of grades and better, going forward, I think where we get to ultimately remains to be same. But I think we are not there yet with the ramp up. So I think consequently we are not there with the unit cost. So, there is probably more to come, I would suggest.

Brock Sailier - GMP Securities

Great, and on the capital spend, I think our budget year-to-date is sort of somewhat dependent on the trucking fleet coming in. Could you give us a little more color on how you handle the new trucking fleets and white stripping once the increased explosive use comes through?

Andrew Pardey

All of the -- Brock, good morning. All of the expanded mining fleet is now on-site and the additional trucks and excavated today. And that will be used to continue on with the stripping to the longer-term development of the mine. So we can continue to have a continuous ore supply from the open-pit.

Operator

Our next question comes from the line of Jonathan Guy. Please go ahead with your question. Your line is now open.

Jonathan Guy - RBC Capital Markets

Thanks very much. And could you just talk about where you are with the commission to additional explosives and whether you feel that that’s going to impact 2015 production as things stand? And by when you need to get that final approval, if it isn’t impacted 2015?

Andrew Pardey

We haven’t provided annual guidance for 2015 yet. Obviously, we have the 450,000 to 500,000 ounce long-term number in the market. We continue to be in the final stages of approval. We continue to expect the permit in the near future. We can’t give a timeline on it. And it’s really too early to say from our point of view of any impact might be on 2015 guidance. So I don’t think we are near that kind of situation yet. So we’ve been clear that it’s not going to have an impact on 2014 production. And if we are in a situation where we still haven’t received it by the time that we come to provide guidance for 2015, we will obviously provide the relevant improved strategy. But I don’t think we sit here and regard that as a realistic expectation at this stage.

Jonathan Guy - RBC Capital Markets

Okay, thank you. Just briefly second question, obviously some pretty phenomenal exploration results from the quarter. What are your thoughts on that and how do you feel they could impact the year-end result statement for this year?

Andy Davidson

Thanks, Jonathan. There you are right. They are great results, in my view as well. I think they support our outlook for the medium and long term, as I said in the intro for the mine. They are supporting, I believe, these high grades so to continue within both the Amun area where we’re currently producing but also we’re starting to get some good results from the Ptah area as well as we get the development into those lateral and depth expense through from the Ptah decline. And with regard to the resource reserve I would say maybe Andrew should answer that one on when we expect to run out.

Andrew Pardey

At this stage, we are expecting the resource reserve update in 2015.

Jonathan Guy - RBC Capital Markets

And the positive results you are getting out of Ptah makes you think about bringing that to ramping up there more quickly or stick with plan A at moment?

Andrew Pardey

We will stick to the plan A and Amun and we will continue on with developing Ptah, that will be have the second ore source available to it. But at the moment the short term, all the ore is coming from the Amun area and later on as we develop and drill little more the Ptah will be the second source of ore.

Operator

Our next question comes from the line of Alison Turner. Please go ahead with your question. Your line is now open.

Alison Turner - Panmure Gordon

I was just wondering if you could give us a little bit more color on Burkina Faso, you haven’t told us much about what you have been doing there this half and clearly that’s likely to become of increasing interest as it progresses. So, I just wonder if you could give us a little bit more update there.

Andrew Pardey

With Burkina Faso, after the takeover, we recommenced drilling there with one rig in March. We have since upgraded -- we have got the second rig that has also joined. Both two rigs are focusing on resource development around the Batie West area and we are in the process of organizing a third rig to come down that will focus on exploration more of the greenfields and brownfields top exploration with the first two rigs focusing on the resource development and the expansion.

Andy Davidson

And Alison, I would also add to that. When we acquired Ampella, there was a resource there that’s not within the time and so then deemed as a economic viable resource, we need to do more work. And the reason why they acquired the project was the very prospective deltas licenses quite especially throughput licenses across the regional district level share zone. And there is a lot of prospects to drill lot of work to be done and that’s the focus of the very systematic exploration program, that Andrew and his team is started to put in place now. So, we will start to see the results come in over the next months and then next year.

Hopefully, we will have more to say in terms of how we see that project going forward in terms of development and getting to production in due course. And what sort of shape and size that project may look like. At the moment, we don’t have any pretty conceived ideas on what the project scale size cost production profile, et cetera, would look like and that’s obviously going to slow the ounces the exploration results we get over the next couple of months.

Operator

Our next question comes from the line of Will Kustra. Please go ahead with your question. Your line is now open.

Vikas Choudhary - JPMorgan Chase

This is Vikas Choudhry, I wasn’t sure whether it’s me or somebody else. Gentlemen, couple of quick questions for you. The first one is in terms of your guidance for the remainder of this year. That seems like 130,000 for each quarter from now on and for the cost of $700. Are you really confident are we going to actually meet that target? And the second question is to do with the for the ongoing court case. Now, it’s almost four months now since that April ruling came out from the Egyptian government. Are you in a position to give us any kind of timeframe how long more you feel you need to get lawyers and your advisers to actually look into that before we can make our case?

Andy Davidson

Maybe I’ll deal with that court case question first and then Andrew can deal with the guidance question. The court case is ongoing. It has been a lengthy process as we guided it would be from the beginning, in early 2013 just after we filed our appeal we were very clear that this is likely to be a two year process. It’s bureaucratic, lengthy, and we’re now in the part of it. The appeal processes, in what’s called the merit circuit, which is actually the part of the court that will make this ruling in due course, whenever that maybe. But as always, we’ve not been able to provide a timetable because the court doesn’t give us a timetable. And so we can’t provide any clear indication on when we expect this to be resolved other than same we’re near at the end of the process than we are the beginning.

My sort of gut feel is that it would be sometime in the first half next year when we get the next, I mean, the next ruling in October is not going to be the final ruling. I think our legal advisers are clear on that one in terms of expectations. But we don’t control the timetable we haven’t been given a timetable. Those are our best case estimates as we regard to that at this current point in time. Hopefully that answers that question on that one. And maybe Andrew you can say more about the guidance.

Andrew Pardey

Well, the guidance, we’re expecting say a production increase quarter-on-quarter for the remainder of the year through a combination of processes. The plant throughput is productively increasing into the ramp up and understanding how to operate the new circuit continues to improve, and also the growth from the underground operations. But the underground this year is on target to deliver over 800,000 tonnes of ore, and productivity so far has been good. And the development is now in place to providing access to this additional high growth stocking block, which will increase the average grade and hence production in the second half of the year.

Andy Davidson

As I think as well, you should look at it as 130,000 ounces per quarter for Q3 and Q4 versus a progressive ramp up of the plant on the throughput basis. And the grade will starting to come through now and the underground grades, in particular, will probably -- and the open pit for that matter, the grade will probably be stronger in Q4 than it is and is expected to be stronger in Q4 than it is Q3. So, I think you’ll see more in Q4 than Q2. So that’s the nature of the ramp up as well as the grade profile as well.

Vikas Choudhary - JPMorgan Chase

And the cost?

Andy Davidson

And the cost, the operating costs will come down accordingly with the increases in productivity, the grade obviously a key driver of that gross throughput. We get more ounces unit cost per ounce produces. On an absolute dollar, cost obviously, costs continued to go up in dollar terms in line with the ramp up. But the productivity offsets, the ramp will come through in the coming quarters.

Operator

Our next question comes from the line of Jason Hill. Please go ahead with your question. Your line is now open.

Unidentified Analyst

Good morning. My question relates to your joint venture with Alecto Minerals. I was wondering how you felt that was going? And when you expect it to have some news on the exploration drilling?

Andrew Pardey

The Alecto JVs, we’ve done drilling down on the seven prospect, and we’re waiting for those results to come back to determine the focus in the way we take that JV forward. And on the Western prospects that we’ve got back, a very much an earlier stage project where we’re still going for the process of geochem and rock chip sampling before we would look at moving into that drilling phase. But it’s still in the early phases that there has been a lot of ground work completed in both of those prospects.

Unidentified Analyst

And are you happy with what you’ve seen so far?

Andrew Pardey

From a geological point of view on the 71, yes, that looks very interesting. So as I said, the western block is more -- it’s very early stage that really depends on getting all the geochem results back and interpreting those to identify trends.

Operator

Our next question comes from the line of Cailey Barker. Please go ahead with your question. Your line is now open.

Cailey Barker - Numis Securities

Just a question on CapEx and exploration spend, I thought obviously CapEx has come right down while exploration cost have jumped up this quarter. Could you give us an idea of what we could expect for this second half on steady state?

Andy Davidson

This was a steady state, we’ve had in the presentation for sometime it’s in the region of $80 million to $100 million per annum which you would regard essentially as sustaining CapEx as a whole. That half is $40 million to $50 million per annum would be for the underground development and the rest would be for pit development and maintenance CapEx, standard maintenance CapEx. The residual CapEx for the open-pit fleet, there is still a residual amount that to come, I think the current run rate is what we would expect guided to about $12 million per annum for the underground. And I think probably Burkina Faso will be in the region of $7 million or $8 million for the year, probably a bit more next year. And Ethiopia is relatively low spend is in early stage and kind of low level of spend. So, the budget would be $1 million to $2 million or less depending on results, or more depending on results but yes.

Cailey Barker - Numis Securities

Okay, thanks. And then just a second question just on the profit sharing, obviously that’s moved into the next financial year. Is that a big jump or it’s just slightly moved over at the end of the period?

Andy Davidson

Yes, I think it’s sensitive because we’re getting towards the end of the cost recovery period excluding the amount that is to be recovered for the Stage 4 expenditure. And now the Stage 4 is being completed those costs starting to get recovered as well. The gold price obviously is under sensitivity depending gold price, you can shift the needle quite considerably either way in terms of because I think we’re getting relatively close, you can shift it back three quarters but with the lower gold price and that’s essentially what’s happened really. So, no change to the model of the forecast or anything, it’s just sensitivities of the profile of the accounting model.

Operator

Our next question comes from the line of Ian Kuehl. Please go ahead with your question. Your line is now open.

Yen Voo - Nomura

This is Yen Voo from Nomura. On the interim dividend of $0.87 per share, what is the guidance for the final dividend? Is there a 50-50 split or like other companies of 1 to 2 for final year?

Andy Davidson

Well, we haven’t guided on quantum for the full year. This is the first interim dividend payment, it’s the first dividend we’ve made. So, the AGM or the annual policy guidelines for the Board would be discretionary policy but we view it as guidelines. This is the first payment, I think if you look at standard practices and usually you find that the interim dividend is exactly half of what the full year is. But I am not preempting what we may or may not do in the full year. I think this is the first dividend payment, interim dividend payment, we set the theme, set the stage for a sustained competitive yield going forward. And we feel very strongly that where we can position ourselves and where we intend to position ourselves, having a competitive payout and certainly this share price is good yield.

Yen Voo - Nomura

And you would still maintain the 15% to 30% of net cash flow post sustaining CapEx, right?

Andy Davidson

We have post sustaining CapEx and after the profit share with the Egyptian government, we pay the Egyptian government their profit share when that kicks in first and then the remaining cash flow and 15% to 30% credit guidelines reported.

Yen Voo - Nomura

So based on your $0.87, what’s the implied payout of the 15, was that within the range?

Andy Davidson

You mean the payout on a yield basis?

Yen Voo - Nomura

Yes.

Andy Davidson

Well, I think it’s just over 1% yield on the interim payout and I think from what I have seen and where the rest of the industry is, I think we already just based on what we paid in the interim that’s the reason the competitive yield even if you annualized it. So, I think with potential services that are going to come in the full year then we should be able to have an overall payout for the year, is very competitive versus the sector.

Operator

Our next question comes from the line of Bart Jaworski. Please go ahead with your question. Your line is now open.

Bart Jaworski - Davy

I was just wondering given we’re sort of half way through the third quarter, I am wondering if you could provide any color on the throughput rates you’re getting right now the recoveries and maybe the underground grades?

Andy Davidson

Look, we don’t as you know provide the monthly figures. I think we just say that in July we saw progress with the underground grade mine and also further increases in plant productivity. So, those two key drivers and we’re tracking in the right direction in July, in the period to-date. And we expect further improvements on all fronts in the coming months and hence the reason for no change in the guidance of course and the expectation. Although another thing worth highlighting is that we have completed a mill reline in the period which was brought forward slightly from September. So, I don’t know the reason to expect productivity to be slightly better but look I mean all these things are just speaking to grades and productivity going in a direction that we’ve indicated they will go.

Bart Jaworski - Davy

And on the results that you got from the exploration from the underground, definitely some zingers in there, absolutely looking very robust. Just wondering where exactly do they plot in terms of being, are they within the current resource envelope or are they outside of it?

Andrew Pardey

The Ptah ones are outside of the current underground result and the Amun results, some of the Amun results within the current results and other just below the actual reported resource area, what they’re showing is a continuation of these high grading systems below the existing areas in Amun

Bart Jaworski - Davy

And is there a map anywhere or a long section or cross-section that we could see the boundaries versus your interest subs?

Andy Davidson

We’ll get that updated in time but we got a site visit coming up in September. So, I think that will probably be the appropriate time for us to take you on the site visit with the detail of where some of these results are coming from but then obviously that will be in public disclosure at that time.

Bart Jaworski - Davy

And just the last question on the court case. So, you mentioned just earlier that October is definitely not the final and we knew that before but I thought before the general thinking was that it may be thrown out in October given the new legislative environment within Egypt. Is that no longer the case?

Andy Davidson

Well first think Bart, I don’t think you can say anything in these things. Certainly our expectation and our legal advisors advised to us that the next hearing will not be the final one based on the wording of the judge’s comments at the end of the last hearing. In terms of the new law, you’ll be aware and it’s been reported in the press that there is a challenge by some of these third parties that are taking claims against companies such as us. And they’re challenging the constitutionality of this new law, we obviously can’t comment on that as the process is they got to go through the supreme constitutional call before we get clarity on how this new rule is going to be expedited.

Our legal advisors again have said to us quite clearly that this constitutional claim should not have any merits and shouldn’t find any sway in the supreme constitutional court but that obviously remains a matter for the court. But again with these new court processes we don’t have a timeline on that. All I would say is I suppose outside of that particular process I would expect the government and the court the judiciary in general are quite incentivized to get this issue result as quickly as possible. So that we can have the clarity on all these cases and then move forward but that’s just my view. We’re in the court process for that new law and we’ll get the clarity in due course.

Bart Jaworski - Davy

Right. So the constitutional court decision may not happen until later this year i.e. after your October court date?

Andy Davidson

That’s certainly a possibility, but I think the important thing here Bart is the expected final outcome doesn’t have to change. We’ve continue to operate all through this appeal and we continue to enjoy the full support of the government in this matter. We have no reason to doubt whether it’s by virtue of this new law or, there is a court case going, it’s due course and outside of the scope of this new law or by some other means we’ve very little to help. But you can never say with 100% certainty but we’re as confident as we possibly can be that we will continue to operate. And I think that’s the track record since this originally broke out 18 months, two years ago.

Bart Jaworski - Davy

And recently there has been no precedence in terms of other companies in your predicament that have got positive judgments.

Andy Davidson

There have been other hearings and other cases since the new law was brought out and most cases have been adjourned and this constitutional hearing has given the opportunity to go ahead.

Operator

(Operator Instructions). And our next question comes from the line of Alison Turner. Please go ahead with your question. Your line is now open.

Alison Turner - Panmure Gordon

I wondered if you could just give us your thoughts on the political situation more broadly in Egypt at the moment and particularly as we approach parliamentary elections later this year?

Andrew Pardey

I mean we don’t comment on the wider politics in Egypt but think the operation is continued without material interruption since the beginning of 2013. I think in that context we continue to observe a good and improving operational environment, I think that’s the key point. So, the outlook for Egypt I think is broadly being recognized by investors, the investment community is improving and that is helping sentiment towards us and our share price. But we’ve always had the line, there is a dichotomy between the reality on the ground and the perception, the headline risk, a political risk in Egypt. We’re seeing those two things coming to line there, where the perception is starting to realize actually the outlook and the operating environment in Egypt is much better than it has been for some time.

Operator

Our next question comes from the line of Lloyd Johnson. Please go ahead with your question. Your line is now open.

Unidentified Analyst

What news have you got on the fuel subsidy court case?

Andy Davidson

We’ll that’s a process that is ongoing. I think we’ve always made the argument that, yes, we paid for the international price going forward from that point in January 2012 when the subsidy was removed where we dispute the means by which the subsidy was removed from us selectively that we should fit in with a mechanism, it’s more in the broader sense once its settled and I think that’s the key point. I think you have seen the government starting to address the fuel subsidy issue but that’s the mechanism by which fuel subsidies, generally an agent will be removed, it is something that will be clarified over time. We’re starting to get progress on that but it’s difficult to say in that context where we will get resolution on our argument but we should essentially fit in with whatever broader mechanism is determined for removal of fuel subsidies in Egypt.

Unidentified Analyst

And at the moment is that a process that is being held in a queue behind the principle court case or in theory should this be being dealt with at the same time?

Andy Davidson

It’s a separate case in a separate court; it’s not related to the concession agreement and it’s not a same process.

Operator

As there are no further questions, I will return the conference to you sir.

Andy Davidson

Thank you very much operator and thank you for everybody on the call and thanks for the questions. Look forward to speaking to you again. Thank you. Cheers.

Operator

This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.

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