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Eldorado Gold (NYSE:EGO)

Q3 2011 Earnings Call

November 03, 2011 11:30 am ET

Executives

Fabiana Chubbs - Chief Financial Officer, Treasurer and Risk Manager

Norm Pitcher - Chief Operating Officer

Paul N. Wright - Chief Executive Officer, President and Director

Nancy E. Woo - Vice President of Investor Relations

Analysts

Anita Soni - Crédit Suisse AG, Research Division

Josh Wolfson - Stifel, Nicolaus & Co., Inc., Research Division

Operator

Good morning, ladies and gentlemen. Welcome to the Eldorado Gold Corporation Third Quarter Financial and Operating Results Conference Call. This call is also being webcast and is available on the Eldorado Gold website at www.eldoradogold.com. I would now like to turn the meeting over to Ms. Nancy Woo. Please go ahead, Ms. Woo.

Nancy E. Woo

Thank you, operator. This presentation includes statements that may constitute forward-looking statements or information. Any forward-looking statements made and information provided reflect our current plans, estimates and views. Forward-looking statements are information which include all statements that are not historical facts, are based on certain material factors and assumptions and are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated and/or suggested by the forward-looking statements or information. Consequently, undue reliance should not be placed on these forward-looking statements and information. The information contained in our annual information form and in our annual quarterly management discussion and analysis available on our website and on SEDAR identifies factors and assumptions upon which the forward-looking statements or information are based on and the risks, uncertainties and other factors that could cause actual results to differ. All forward-looking statements and information made or provided during the presentation are express qualified in their entirety by this cautionary statement and the cautionary statement contained in our press release dated November 3, 2011.

I will now turn the call over to Paul Wright, President and CEO of Eldorado Gold

Paul N. Wright

Thank you, Nancy, and good morning, ladies and gentlemen, and welcome to Eldorado Gold Corporation's Third Quarter Financial and Operating Results Conference Call. Joining me this morning in Vancouver are Norm Pitcher, our Chief Operating Officer; Fabiana Chubbs, our Chief Financial Officer; and Nancy Woo, our Vice President of Investor Relations. Following a few introductory remarks from myself, Norm will take you through the operating highlights for the third quarter and some brief commentary on what to expect for the balance of the year. Fabiana then in turn, will comment on the financial results for the quarter and then we'll open up for questions.

We are all very pleased with the quarter results and we are also aware we expect -- we are also very pleased to where we expect to be in terms of the end of the year. The mines continue to operate in accordance with the plans, with Kisladag, White Mountain, Tanjianshan, Jinfeng and Vila Nova all contributing to a record quarter of revenues, record production and record earnings. We're also very happy with a steady ramp up of production at our new Efemçukuru mine in Turkey and remain on schedule to have the construction of the concentrator treatment plant in Kisladag completed in December. Many of you, in the past few weeks, have had the opportunity to visit our assets in China and Turkey, which combined, represent approximately 75% of our net asset value. So I will not spend much time this morning on commenting on the individual assets. Again, as I mentioned earlier, I'll leave that to Norm on his section.

We were also pleased in the quarter to strengthen and further clarify our commitment to delivering upon a meaningful dividend policy. I'm also pleased to confirm that yesterday, the Eldorado Board of Directors formally approved management's recommendation previously announced to expand throughput of our Kisladag mine to 475,000 ounces annually. This will be accomplished over the next 3 years through the planned investment of approximately $350 million. At this point in the calendar, a lot of effort is being applied to finalize plans for 2012 and we look forward to providing you with full corporate guidance for 2012 early in January. At this time, I'll hand over to Norm.

Norm Pitcher

Thanks, Paul, and good morning, everyone. I will start with operations, and I think, to a certain extent, the results speak for themselves. We had a very strong quarter operationally. Starting in Kisladag, which did very well, produced 86,788 ounces at a cash cost of $3.77 per ounce, and we placed around 3.5 million tonnes of ore on the leach pad at a grade of 1.9 grams per tonne and a Phase 3 upgrade, which took us to 12.5 million tonnes per annum continues to perform at or above design. At Tanjianshan, we produced 26,935 ounces at a cash cost of the $3.53 per ounce. During the quarter, we had a 16-day power shutdown as the provincial power authority conducted routine maintenance on the distribution system. However, even with the shutdown, we were still able to meet budgeted ounces and cost at Tanjianshan. Jinfeng produced 44,402 ounces at $4.24 per ounce. We're currently working on acquiring the land needed for the final pit pushback and expect to start that pushback in Q1 2012. At White Mountain, we produced 21,270 ounces at $4.75 per ounce, a very good performance for White Mountain, where improvements in the process plant and in the mine are becoming quite evident this year. Vila Nova, the iron ore mine in Brazil, we had better weather during Q3 which allowed us to improve our transportation logistics and mining operations. And for the quarter, we sold almost 171,000 tonnes of iron ore. On to development, as Paul mentioned, we have -- the board has approved the results of the Kisladag expansion study, which sees the mine increasing ore production from 12.5 million tonnes per annum to 33 million tonnes per annum, which is 25 million tonnes through the crusher, an additional 8 million tonnes run of mine ore by Q4 2014. A big focus for development for the quarter, of course, is Efemçukuru, where we continue to ramp up production throughout the quarter. At Efemçukuru, we mined 59,000 tonnes at 9.3 grams per ton, and treated 57,500 tonnes at 8.9 grams per tonne. Grinding and floatation circuits are fully operational. Recovery looks good and we are shipping concentrate to Kisladag where the recovery plant to produce ore will be completed this quarter. At Eastern Dragon, most of the civil works on-site were completed. During the quarter, we're pushing on finishing any outside work on the plant as winter approaches. Piping and electrical installations inside plant were started during the quarter and work on those will continue into the new year. As we announced last month, we'll be delayed on starting earthworks on the tailings facility and waste dump until springtime pending the receipt of final permit approvals.

Onto to exploration. Simply, just on the fairly comprehensive press release on that, updating everyone on recent exploration results. I'll just touch on some of the main points. We currently have 34 drills working throughout the world on 16 projects. In Turkey, we've had encouraging results at Efemçukuru from a Northwest extension zone, where we're defining a new ore shoot that will be included in the year end reserve and resource statement. In China, we continue to explore aggressively at our 3 operating mines, including infill drilling at the 323 zone at Tanjianshan to bring this ore zone into reserve category this year. At Jinfeng, we have 7 drills concentrating on near-mine targets both on the surface and underground. And at White Mountain, we have discovered a new zone of higher grade mineralization down plunge from the main orebody.

In Brazil, we continue to test targets at Tocantinzinho, and have made the option payment at the Agua Branca property where a recent hole returned Tocantinzinho style with some grades.

With that, I'll turn it over to Fabiana.

Fabiana Chubbs

Thank you, Norm. Good morning, everyone. I will go through the financial statement, highlighting changes in significant accounts.

Commencing with the balance sheet, we ended the quarter with cash and cash equivalent balance of $357 million, compared to a near-end cash balance of $340 million. The increasing cash balance is a result of cash generation from operations, net of the usage of cash for debt repayment, capital program and dividend payment. The inventories increase is mainly related to material and supply as a result of increase in operational needs requirements. I would like to bring to your attention that inventory levels will increase during commissioning of the Efemçukuru mine, as flotation concentrate is produced at Efemçukuru and shipped to Kisladag for further processing.

On the liability side, yesterday, we paid $74 million of the outstanding debt, which brings the debt balance to $105 million as of September 30, 2011. During October, we paid an additional $18 million on this debt. As you may recall, this is the debt with Chinese banks resulting from the acquisition of the Sino Gold mines, and at acquisition, it has a balance of $190 million.

Moving on to the income statement. Revenues of the $326 million for the quarter were up $136 million from a year ago due to higher selling prices and an increase in sales volume mainly for increased production at Kisladag. Year-on-year, the $270 million revenue increase is a result of higher gold prices, as well as revenue from iron ore sales.

On the income tax expense, for the quarter was $63 million, compared to $30 million in the same quarter last year. This increase is due to higher taxable income from operations in Turkey and China and the impact of the weakening Turkish lira incurred on deferred income taxes. I discussed with you during the visit at our Turkish mine, under IFRS, a company has to revalue its tax basis of foreign currency using the current exchange rate and record tax evaluation as income taxes in the income statements. This results in volatility in income taxes due to foreign exchange rate movement. As a way of reference, a 10% change in the exchange rate for the Turkish lira will result in approximately $7 million adjustment in our deferred taxes, and a 10% change in the exchange rate for the RMB will result in approximately $16 million adjustment. On the cash flow statement, we generated cash flow from operating activities before changing in non-working capital of $367 million for the 9 months ended September 30, 2011, as compared to $270 million in 2010. This increase is a direct result for an increase in operating profit. The 3 main usage of cash related layer of cash relate to our capital program $202 million repayment of debt, $74 million, and payment of dividend, $61 million. Those are my comments on the financial statement, I will return the call back to Paul.

Paul N. Wright

Thanks, Fabiana and thanks, Norm. Operator, we'll open up for questions please.

Question-and-Answer Session

Operator

[Operator Instructions] The first question is from Anita Soni from Credit Suisse.

Anita Soni - Crédit Suisse AG, Research Division

My question is with regards to the royalty rate at Jinfeng. They went up substantially this quarter, could you just provide some clarity on that?

Fabiana Chubbs

The royalty rate. I don't see...

Paul N. Wright

I don't see -- the royalty rates, per se, would not have gone up, Anita.

Anita Soni - Crédit Suisse AG, Research Division

Sorry, not the rates but the actual amount -- dollar amount paid per ounce seem to, I think, go from $50 per ounce somewhere up to about $70 or so?

Fabiana Chubbs

With this -- the rate difference?

Anita Soni - Crédit Suisse AG, Research Division

Yes.

Fabiana Chubbs

What was -- sorry, Anita, what was the rate that you were estimating?

Anita Soni - Crédit Suisse AG, Research Division

I believe it went from -- it went upwards to -- by about -- up to $70 per ounce instead of $50, the prior quarter.

Fabiana Chubbs

What you're having there, I think it's the ecological fee, remember you -- we indicated in the previous quarter?

Anita Soni - Crédit Suisse AG, Research Division

I'm sorry, could you repeat that again? Could you repeat that, please?

Fabiana Chubbs

Sorry, my mistake. I thought it was the wrong mic.

Paul N. Wright

Let us come back to that, Anita. Because I think, it's not the royalty rate, per se. What you're looking at is the gap between the cash operating and the total cash cost which is large in the previous quarter. Let us come back to that later in the call with that answer, if you may.

Anita Soni - Crédit Suisse AG, Research Division

Sure. And then also, Jinfeng, do you have your mining from the stockpiles right now or putting the stockpiles, I guess, onto [indiscernible] as the mining rate from the underground isn't keeping pace with what's going on into the mill. Can you give us -- give me an idea of what the stockpile right now is at Jinfeng?

Norm Pitcher

700,000 tonnes.

Anita Soni - Crédit Suisse AG, Research Division

At what grade?

Norm Pitcher

2.5, 3, something like that.

Anita Soni - Crédit Suisse AG, Research Division

And did you say that at Tanjianshan, there is a new zone that would be coming into reserve?

Norm Pitcher

No, yes. this is 323. I mean, we put it into a resource last year, it'll come into reserve this year. We're drilling to bring it up in the measuring indicated, proving improbable.

Operator

[Operator Instructions] There are no further questions registered at this time. I would like to turn the meeting over to Mr. Wright.

Paul N. Wright

Well, we sort of realized that we delivered a very predictable set of financial results and that questions will be few and far between. But operator, are you sure the rest of the lines are plugged in?

Operator

We do have a follow-up question from Ms. Anita Soni.

Paul N. Wright

We'll have to give you a call back, Anita, on this. We'll sort out why the difference is a bit higher?

Anita Soni - Crédit Suisse AG, Research Division

Sorry, I missed the exploration you gave in overview, Norm, on the areas where you're expecting increases. Could you just reiterate those for me since I'm the only one whose got any question?

Norm Pitcher

I didn't actually give a update on where we expect increases. We're not going to really -- I mean, until we do the calculation. But you can sort of look at, we've hit a pretty significant zone at White Mountain, that is sort of normal with and quite a bit higher grade than what we have up above. And if you look at the long section on -- in the press release, you'll sort of see where this is located, down plunge and maybe offset. We're not quite sure yet from the north zone at White Mountain. So obviously, you can sort of look at the spacing there and come up with some ideas.

Anita Soni - Crédit Suisse AG, Research Division

I think did add that from the mine tour. I'm just kind of curious, is that a year-end? Like is that an inferred this year or?

Paul N. Wright

I would think that will probably be an inferred this year.

Anita Soni - Crédit Suisse AG, Research Division

And then perhaps further in next year?

Norm Pitcher

Yes. What we're doing on that zone, in particular, Anita, is we've got -- we're going access from our main ramp there in the next couple of months or so to be able to start drilling it from underground. So we're going to hit that pretty hard next year. Yes and because it obviously has a -- it obviously has some fairly significant implications on the mine plan going forward, sort of the next 5-year time frame.

Paul N. Wright

In addition to that, Anita, of course, we're onto a fourth ore shoot, or appear to be onto a fourth ore shoot in Efemçukuru as well. So you'll start to see that coming into resources this year, and as Norm mentioned earlier, at Tanjianshan where we had an inferred resource, we'll be bringing that up into measured and indicated making that eligible for reserve.

Anita Soni - Crédit Suisse AG, Research Division

A fourth ore shoot? So this is different between the south, middle and north?

Paul N. Wright

That's right.

Norm Pitcher

We're drilling to hit the Northwest extension. And how it links on to the north, whether it's simply an extension of the North shoot or of the North ore shoot or separate shoot, we're not quite sure yet. I mean we're still...

Anita Soni - Crédit Suisse AG, Research Division

So that's the Northwest extension you were talking about.

Norm Pitcher

That's the Northwest extension, yes.

Operator

The next question is from Josh Wolfson of Stifel, Nicolaus.

Josh Wolfson - Stifel, Nicolaus & Co., Inc., Research Division

I just want to ask, in the release, you mentioned technical issues at Perama Hill being discussed with the minister of environment there. Could you provide some detail on what the differences, I guess, between what the feasibility study and what's being evaluated now and how that's being discussed in the ministry ?

Paul N. Wright

No, there's no differences. I mean, what we're doing right now is discussing the EIA. I mean, the pre-EIA is working its way through the Ministry and we're preparing for approval of that and then -- in preparing the ground for the submittal of full EIA.

Josh Wolfson - Stifel, Nicolaus & Co., Inc., Research Division

Okay, so no technical changes I guess that you would expect at this point?

Paul N. Wright

No, we probably could have worded it a little bit differently. I mean, that it's not technical issues that we're having to deal with, it's just that we're going through all the technical parts of the feasibility study.

Operator

There are no further questions registered at this time. I would like to return the meeting over to Mr. Wright.

Paul N. Wright

Mr. Wright will answer that, but thank you, no, thank you, operator and thank you, everybody for attending and I would like to extend our appreciation for the group that toured with us in Turkey and China, and we enjoyed your company and we sure look forward to the next time. All right, thanks, operator. We'll wrap it up.

Operator

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

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