Centerra Gold Inc. Q2 FY2020 Earnings Call

Greetings, and welcome to the Centerra Gold 2020 Second Quarter Results Conference Call and Webcast. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. As a reminder, this conference is being recorded Friday, July 31, 2020. I would now like to turn it to John Pearson, Vice President, Investor Relations. Please go ahead, sir.

Thank you, operator. I would like to welcome everyone to Centerra Gold's second quarter results conference call. We have summary slides which are available on the Centerra Gold website to accompany each speaker's remarks. Today's call is open to all members of the investment community and media, and following the formal remarks, the operator will give the instructions for asking a question, and then we will open the phone line to questions. Please note that all figures are in U.S. dollars unless otherwise noted. Joining me today remotely is Scott Perry, President and Chief Executive Officer; Darren Millman, Chief Financial Officer; Dan Desjardins, Chief Operating Officer; and Yousef Rehman, our General Counsel. I would like to caution everyone that certain statements made today may be forward-looking statements and as such are subject to known and unknown risks which may cause our actual results to differ from those expressed or implied. Also, certain of the measures we will discuss today are non-GAAP measures. Please refer to our description of non-GAAP measures in the news release and MD&A. For a more detailed discussion of the material risks, assumptions, and uncertainties, please refer to our news release and MD&A issued this morning along with the unaudited financial statements and notes and our other filings, all of which can be found on SEDAR and the company's website at CenterraGold.com. And now I'll turn the call over to Scott Perry.

Thanks, John, and good morning everyone and thanks for dialing into our Q2 earnings conference call. I hope everyone is safe and well during these extraordinary times of the COVID-19 pandemic. In terms of my remarks, I'm just referencing slide 5 of our accompanying earnings conference call presentation deck. Just looking at each of these bullet points, the first bullet point here just regards the COVID-19 pandemic. Obviously, these are extraordinary times. I think we, as a team and as a company, have been very diligent in terms of the preventative measures and the protocols we've put in place, and I think it's been serving us well to the best of our knowledge. All three of our operations are currently virus-free, and you see that in terms of our operating results, our levels of productivity, etc. Generally speaking, we've been unaffected by the COVID-19 pandemic. In terms of safety, it continues to be a primary focus for us as well as the COVID-19 pandemic. The well-being, health, and safety of our employees is our number one focus. In terms of safety, we had a number of milestones in the quarter, but really one of the key notable ones, Öksüt, our new operation in Turkey, just recently achieved three million manhours of lost time incident-free operations, which is a fantastic milestone for the property and full credit to our leadership team in Turkey. Likewise, you can see here in the third bullet point, one of the key milestones during the quarter was Öksüt, which is our new gold mining operation, our third operation. We actually declared and achieved commercial production during the quarter. This has again been a fantastic milestone. We poured first gold in January, and to be so quickly declaring commercial production thereafter, I think is very competitive. In terms of the operational results, I think it's a great quarter for the company. You can see here in the fourth bullet point, we produced just under 220,000 ounces of gold and just over 19 million pounds of copper. There was an excellent level of gold production and copper production, which really resonates in the bullet points below where, if I reference the last bullet point, our overall sustaining cost company-wide was very competitive at $804 per ounce. You can see in parentheses there that each of our operations were each producing gold lower than an estimated sustaining cost of $700 per ounce. So at Kumtor, $692 per ounce, and Mount Milligan $679 per ounce, with Öksüt at a very low cost of $537 per ounce. So, albeit Öksüt is still in its sort of initial ramp-up phase, it is already presenting as one of our lowest cost operations in our portfolio. In terms of the prevailing gold price environment, this makes for a very high-margin business. If I move to the next slide on slide 6, just to address some of the financial highlights. You can see the first bullet point here just given that low all-in sustaining costs, the high level of productivity, and the high margins that I referenced earlier, which really flows through in terms of the bottom-line profitability. Our net earnings during Q2 were $80.7 million, equating to $0.27 per share. The cash provided by operations was a very strong $268 million. However, the key takeaway is the business is performing well, given the current gold price environment, the level of production, and the low all-in sustaining costs that is reflected in our free cash flow generation. So, in Q2 on a company-wide basis, we generated $169 million of positive free cash flow, with all of our operations generating meaningful positive free cash flow. Kumtor itself generated $157 million of positive free cash flow, Mount Milligan generated $34 million positive free cash flow, and Öksüt, having just declared commercial production, generated positive free cash flow of $5 million—a promising outlook as we expect meaningful progressive increases in production from Öksüt moving forward. We finished the quarter with a debt-free balance sheet, which I think presents very well, resulting in a net cash position of $212 million, and with total available credit lines, we now have $712 million in liquidity. We continue to maintain our guidance, originally issued at the beginning of this year, as we haven't seen a meaningful impact from the COVID-19 pandemic. Last bullet point is that we've increased our quarterly dividend by 25% going forward, maintaining it at $0.05 per share. We're benefiting from a lot of devaluation in the local currencies where we operate, as well as a lower diesel fuel price. The margins we’re seeing are potentially the highest margins I've seen in the five years I've been with the company. Moving on to slide 7, focusing on the free cash flow theme, you can see the chart illustrating the level of free cash flow generated by the operating mines. All three mines together generated $294 million of free cash flow for the first six months of this year. Again, I think this puts us in a strong position as we move forward. Lastly, I will turn the call over to Dan Desjardins, our Chief Operating Officer, who will expand on some of the operational highlights. Dan, please go ahead.

Thanks, Scott. Good morning, everyone. Please move to slide 9. Our Q2 operational highlights start with safety, and we have a number of highlights. In April, both Kemess and Öksüt achieved a one-year lost time injury free. At Kumtor, where you have 900 contractors, they've just achieved two years without a lost time incident, and then in July at Öksüt, the 1100 strong workforce there hit 3 million man-hours without a lost time incident. We are very proud of that operation. On the production front, we had a very strong quarter, producing 219,692 ounces of gold and 19.1 million pounds of copper at an all-in sustaining cost of $804 per ounce sold. In terms of Q2 results by operation, Kumtor continues to produce at a steady rate, blending the cutback 19 ore feed from the stockpile with a recovery rate of 84%, which was very strong. On the COVID front in Kyrgyzstan, it was substantially under control in April and May due to strong measures taken by the government, although there has been a large increase in cases recently. Due to the remoteness of our operation, we can test and quarantine employees and contractors at our off-site facility before going to the mine site, allowing us to maintain a virus-free property. Regarding operating supplies, we've built up inventory in case of interruptions and have strong government support to continue operations. In the second quarter, Kumtor produced 173,245 ounces at an all-in sustaining cost of $696. The site also made significant capital equipment purchases and finalized our new design for the Lysii waste dump, which received government approval. Overall, Kumtor generated $156.9 million in free cash flow in Q2, bringing our year-to-date free cash flow to $253 million. Shifting to Mount Milligan, COVID in northern British Columbia is under control. We achieved a throughput average of 48,000 tons per day in Q2, with a record of exceeding 63,500 tons per day in June, and produced 35,656 ounces of gold at an all-in sustaining cost of $679 and 19.1 million pounds of copper. We have ample water supply and continued medium and long-term water solutions. Mount Milligan generated $34 million in free cash flow in the quarter and $56 million year-to-date. At Öksüt, we achieved commercial production on May 31, with 10,791 ounces produced for an all-in sustaining cost of $537 per ounce for one month of commercial production. Even during ramp-up, it generated $13.5 million in cash from operations and $5 million in free cash flow for the quarter. For 2020, we continue to focus on improving our safety performance and have engaged subject matter experts to enhance controls, particularly of key risks. At Öksüt, we continue ramping up commercial production. For Mount Milligan, we are focusing on achieving consistent and improved mill throughput and recovery. Kumtor is on track to deliver its updated 43-101 technical report this fall, validating that the mine is indeed a tier one mine. Lastly, I will now turn the call over to Darren Millman, our Chief Financial Officer.

Thanks, Dan, and good morning everyone. For those following along on our investor deck on slide 14, Centerra recorded $412 million in revenue during the quarter. This consisted of $346 million in gold sales, $40 million in copper sales, and $26 million from a molybdenum business unit. The average gold price realized was $1,620 per ounce and $2.06 per pound of copper. During the quarter, we sold 217,000 ounces of gold—170,000 ounces attributable to Kumtor, 35,000 ounces from Mount Milligan, and 12,000 ounces sold at Öksüt. Net earnings of $80.7 million were recorded, which included a $17.1 million non-cash adjustment related to our closed site asset retirement obligation. The adjusted earnings after excluding the non-cash IRR expense was $97.8 million, with an adjusted earnings per share for the quarter of $0.33. From a consolidated cost perspective, production costs were $410 per ounce and all-in sustaining costs were $804 per ounce. At an asset level, Kumtor recorded all-in sustaining costs of $696 per ounce, while Mount Milligan recorded $679 per ounce for the quarter. The all-in sustaining cost for Öksüt in June was $537 per ounce. All of our operations recorded significant improvements in cash provided by operations, with Kumtor recording $220 million in cash from operations, a 138% increase. We generated $160 million in consolidated free cash flow for the quarter, with Öksüt contributing $5 million in free cash flow while still in its early phases of ramp-up. Year-to-date, the company has generated $246 million in free cash flow. We repaid all of our debt and finished with $212 million in cash and $712 million in total liquidity. Year-to-date, the company has produced 410,000 ounces of gold, tracking well to achieve guidance. Full year production guidance is maintained between 740,000 ounces to 820,000 ounces for 2020. I'm pleased to announce that given the financial strength of the company and the free cash flow generation from all three mines, the Centerra board increased the quarterly dividend to $0.05, a 25% increase. I will pass it back to Scott.

Thanks, Darren. To wrap up the presentation here on slide number 17, I want to highlight a couple of points. We are targeting up to 820,000 ounces of gold and an all-in sustaining cost below $820 per ounce. In the prevailing gold price environment, this presents strong profitability and ongoing free cash flow potential. We are pleased with the competitive quarter, good gold output, and competitive all-in sustaining costs that resonate through our profitability and our generation of free cash flow of $169 million, a peer-leading result. Regarding our balance sheet, we have achieved a debt-free position finishing the quarter with a net cash of $212 million and $712 million in total treasury liquidity. The board has declared a 25% increase in our quarterly dividend, which is $0.05 per share. Lastly, we remain on track to release Kumtor's new 43-101 Technical Report this fall, which will showcase a meaningful expansion of Kumtor's reserves. With that, I will now turn the call back to the operator for the Q&A session.

Certainly. And the first question is from Bryce Adams at CIBC. Please go ahead.

Hi, good morning Scott and Dan. Thanks for taking my questions. I have two operational questions. Firstly, the big drive at Kumtor coming from the stockpiled ore will tick under 4 grams per ton. And the stockpiled ore grade is 1.8 grams to my understanding. In that context, our question is for how long is that elevated grade profile sustainable and what's your grade outlook for the second half?

Thanks, Bryce. I'll give that call to Dan.

Absolutely. Bryce, we have a large stockpile that we actually have in our life of mine plan. You always see that we end up milling for a couple of years after the end of the mine life. So, we have a very large low-grade stockpile set aside. Our cutoff grade is 0.8 grams, so when you see the average of 1.8, that's the averaging of the whole thing. Our second half, as Darren indicated, we will be lowering the grade slightly, but we're blending both our high-grade, medium-grade, and whatever amount of low-grade that we want to maximize our recoveries, feeding from the stockpile. So, in answer to your question, we anticipate we'll still be within our guidance ranges for production.

Got it. So, for the second half, do you think it would normalize back to sort of Q1 levels that is a good draw to use?

Yes, we're targeting guidance. We believe we're going to be within guidance, so yes, back to quarter one.

My second question rises to Mount Milligan unit cost. So, 2020 cost per ton for mining and milling continue to demonstrate significant improvement over the 2019 levels. Could you touch on, and remind me what the key drivers are for that cost improvement?

Well, one of our general manager from here has been there a year and a half ago and has been doing an excellent job just looking for efficiencies. They've also benefited from the lower diesel fuel price which is one of our major cost drivers. Our organizational structure has been flattened. Overall, we've found efficiencies in mining, anticipating continued benefits.

Thank you. Good morning, everybody. I'd like to talk a little bit about this COVID situation that seems to be escalating in Kyrgyzstan at potentially around Kumtor. Specifically, I'm trying to understand the implications on your 2021 production profile. We’ve only mined 585,000 tons of ore year-to-date, and if you're going to curtail rates going forward to keep the headcount down, what are the implications for 2021? What’s the plan to keep the mills operating?

Thanks, Dalton. Dan, how about you address that?

Yes, thanks, Dalton. We have been affected on our total mine tons, due to our tragic incident in Lysii. Another complication is during this spring, the weather has affected some of our operations. We believe we're coming around the corner now that we've got our permits to go back into the Lysii. Our mine plans have adjusted, and we expect to achieve a similar level of gold production in 2021 consistent with our original life of mine plans.

Okay, great. So, 2021 production is not at risk despite that you may be mining less ore now this year.

Correct. The plan always for this year, even pre-pandemic, was to exclusively treat ore from our stockpile inventory.

Right. I understand that but I'm just wondering where the ore from 2021 will come from. So, that would be our stockpile ore as well?

For the first half of 2021, we will utilize stockpile ore, and then we will progressively move into ore release from cut-back 21.

Yes, thanks. Maybe just a quick housekeeping question on the coronavirus-related issues. Does the Kyrgyz Republic have travel restrictions that make it hard to bring in people that you need as consultants or even those on rotation? How are you addressing that?

Dan, do you want to take that, please?

Yes, since the beginning, the government had greatly restricted regular flights. Mining companies have been able to bring in their expats. However, we've minimized the number of expats in country to avoid contributing to any increase in cases. We've learned to manage remotely, and we've found different ways to complete our consultative work.

Do you expect that 43-101 report will come out in Q3 or Q4?

I can’t provide specific timing yet. We're focused on quality and thoroughness, and the board is prioritizing those aspects in our discussions.

Yes, that's great, Scott. Thank you all for joining us on the call today, and I look forward to answering any further questions. So, with that, we'll wrap up the call. Thank you.