Centerra Gold Inc. Q4 FY2020 Earnings Call

Greetings! And welcome to the Centerra Gold, 2020 Fourth Quarter and Year End 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 Wednesday, February 24, 2021. I would now like to turn the conference over to John Pearson, Vice President, Investor Relations. Please go ahead, sir.

Thank you, Carlos. Welcome everyone to Centerra Gold’s 2020 fourth quarter and year-end results conference call. And today we will also present an update on the extended mine life at Kumtor, as detailed in the new Kumtor 43-101 technical report filed on SEDAR today. Summary slides are available on Centerra Gold’s website to accompany each speaker's remarks. Today’s call is open to all members of the investment community and media in listen-only mode. 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. As we continue to work remotely, joining me on the call today is Scott Perry, President and Chief Executive Officer; Darren Millman, Chief Financial Officer; Dan Desjardins, Chief Operating Officer; Malcolm Stallman, our Vice President Exploration, and Yousef Rehman, our General Counsel. I would also 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 the description of non-GAAP measures in our news release and MD&A issued this morning. For a more detailed discussion of the material assumptions, risks and uncertainties, please refer to our news release and MD&A, along with the audited financial statements and notes and our other filings, all of which can be found on SEDAR and the company’s website at centerragold.com. Now, I’ll turn the call over to Scott.

Thanks, John, and good day everyone. Thank you for joining us for a call. I'm just going to be referencing the accompanying presentation slides deck and I’m just starting off on slide number four. Just on the top left here on slide number four, a number of key highlights that I would like to expand on. Just starting with the first bullet point, you can see 2020 was a very strong year for the company. In terms of our gold output profile, we finished with 824,000 ounces of gold, which was above the upper-end of our guidance. Mount Milligan mine produced 82.8 million pounds of copper and our corresponding all-in sustaining cost was a very low competitive $729 per ounce, which was below, favorably below our guidance, so an excellent operating result for the company. Subsequent to year-end, we announced that we had divested our 50% share in the Greenstone Gold Mines Partnership for approximately $200 million in cash consideration, plus additional contingent payments of up to $75 million. Just looking at the third and fourth bullet points, the strong level of production and the corresponding lower unit cost really resulted in some significant profitability. In terms of operating cash flow during the calendar year, we generated $930 million, and if you look at the fourth bullet point, in terms of the free cash flow metric, company-wide our portfolio generated $604 million of positive free cash flow. As you can see in parentheses, each of our individual operations contributed very meaningfully, with Kumtor generating $438 million, Mount Milligan generating $159 million, and Öksüt, our newest operation in our portfolio, in its inaugural year of operations, contributed $105 million of positive free cash flow. The next bullet point below highlights that, obviously, the strong level of free cash flow helped us establish a peer-leading balance sheet. It’s a debt-free balance sheet and we finished the year with some $545 million U.S. of cash reserves. One of the other key highlights in today’s announcements is we’ve also released our new technical report and life of mine plans for Kumtor. It features a five-year extension to the mine life, newly delineated mineral reserves of some 6 million ounces of gold, which is an increase of some 3.1 million ounces. Additionally, the reserve grade has increased by approximately 15%. This is a fantastic development, and Dan, our Chief Operating Officer, will expand on this shortly. You can see the charts at the bottom of slide four, showing all of our operations generating meaningful levels of free cash flow throughout the year. What really strikes me is the third chart on Öksüt. This mine is particularly exciting as it is our newest operating mine. We brought this mine into operations in January of last year, where we poured first gold. At the end of May, we declared commercial production, and you can see in Q3 and Q4 just the significant levels of free cash flow and profitability that the mine has already demonstrated. This momentum is exciting as we move into this year and beyond, as Öksüt provides us with a third source of high-quality, low-cost production, thereby enhancing our fundamentals moving forward. Moving onto slide five, in terms of Centerra’s ESG profile, just a few bullet points. First, our focus is on zero harm operations. We have a number of leading safety initiatives underway as we speak, and we are seeing benefits from our work-site programs. I think two notable milestones during the year, the Öksüt mine in Turkey celebrated four million hours of lost time incident-free operations, and at Kumtor, we’re getting close to being one year free of lost time incidents, as of today we're at 331 consecutive days. The second bullet point relates to our social life; we’ve now extended this record to 90 consecutive months without disruptions at any global operations. The third bullet point addresses environmental incidents; we had no reportable incidents in the quarter, which was great to see. Lastly, we at Centerra are members of the World Gold Council, which recently rolled out their responsible gold mining principles. We are signatories to these principles, which encompass 51 key ESG principles that we are looking to implement and achieve compliance within a three-year period. We are ahead of schedule at Öksüt, having established assurance already in 2020, although it's not required until 2022, showing significant progress in our commitment. Just moving to slide six, a number of key corporate highlights here. I'll reference three or four. On the fourth bullet point, one of the items that really differentiates Centerra is our low unit operating cost profiles. Company-wide, our all-in sustaining cost of $729 per ounce was competitive, favorably lower than guidance. You can see in parentheses that each of the individual mines are operating in the first quartile relative to the world industry cost; Kumtor at $741, Mount Milligan at $541, and Öksüt at $494. This positions us well in terms of margins, regardless of the prevailing gold price environment we are in. As mentioned earlier, today we are providing our guidance for 2021, which is part of our new multi-year, three-year guidance. For 2021, we are guiding for a mid-point of 780,000 ounces of gold and about 75 million pounds of copper. Based on this level of metal output and the associated all-in sustaining cost guidance, we anticipate generating cash flow from operations of $750 million to $800 million, and corresponding free cash flow of $350 million to $400 million, assuming a gold price of $1,750 per ounce. On slide seven, some of the key financial highlights are worth noting. We finished the year with calendar earnings of $408.5 million, which equates to $1.38 per share. We generated very strong free cash flow of $604 million during the calendar year, which allowed us to end the year with a very strong treasury position, a debt-free balance sheet, and cash reserves amounting to $545 million. Additionally, the board has approved a quarterly dividend of Canadian $0.05 per share. Moving on to slide eight, this slide provides more detail on our guidance for 2021, illustrating gold production guidance with Kumtor coming in at up to 510,000 ounces, Mount Milligan at up to 200,000 ounces, and Öksüt at up to 110,000 ounces. I want to provide a bit of additional commentary on the quarterly profile within the calendar year. For Kumtor, gold production is expected to rise steadily throughout the year, with the first quarter contributing approximately 15% of the annual gold production target, which will increase to approximately 35% by the fourth quarter of 2021. For Mount Milligan, both gold and copper production are expected to be slightly back-end weighted in 2021. In terms of the first half of the year representing 45% or more of their annual targets, while the second half of the year will account for up to 55%. For Öksüt, gold production is also expected to be back-end weighted with the first half representing 35% or more and the second half up to 65%. As noted earlier, we are confident in crafting another meaningful year, guiding for free cash flow of $350 million to $400 million U.S. Moving on to slide nine, we are providing a multi-year guidance outlook, highlighting our expectation for growing levels of gold production over the next three years. Each operational mine is generally increasing their output levels. This growth is a promising sign, and looking down the seventh row will show conducive all-in sustaining costs that reflect favorable economies of scale, reducing over time. Relative to the current gold price environment, this positions us well for operational margins. As demonstrated in 2020, we are well-positioned for growing profitability and positive free cash flow over the coming years. This concludes the first part of our call, and as John mentioned in his introduction, I’d like to move to the second part of our call. I’m passing the proceedings over to Dan Desjardins and Malcolm Stallman. One of the key highlights today was the release of our new life of mine plans for Kumtor, featuring the five-year extension and an addition of 3.1 million ounces of new gold reserves, along with an increased reserve grade of 15%. Dan, our Chief Operating Officer, will provide more detail.

Thanks, Scott. Good morning everyone. Before I get started, I'd like to acknowledge the efforts of our many employees, contractors, and consultants who worked tirelessly over the past year to bring forward this new technical report and extend the life of mine for Kumtor. I’d especially like to thank the Kumtor employees for their results in 2020 under challenging circumstances during COVID and after our tragic accident in 2019 and early 2020. Since then, as Scott indicated, we've had an excellent safety record at Kumtor; today, we are at 331 consecutive days with little lost time incidence. I’ll take you to the next slide in the agenda where I will discuss the technical highlights which Malcolm Stallman will follow, discussing the Kumtor exploration potential. To introduce, we've been operating the Kumtor Mine now for 24 years and have been under the concession agreement since 2009, which runs until 2042. During this time, we have not had a meaningful operational interruption, and we anticipate being able to continue as per the terms of this agreement going forward. On slide 13, the layout of the concession is depicted. The grey area in the center represents the footprint of the ultimate pits, with Central Pit and Sarytor Southwest coming together. On slide 14, Kumtor is undoubtedly a world-class asset. Over many years, we have had production exceeding 500,000 ounces, which we expect to maintain with this new life of mine plan. At the end of 2020, Kumtor has produced more than 13 million ounces of gold at an average grade of 3 grams per tonne. The future sees us extending the pit in both directions and deeper cuts with the new Cut-back hockey stick to the southwest and Cut-back 21 and 22 to the northeast. Moving on, the performance of the mine with substantial ore stockpiles blends for the mill feed enables a steady production rate between 500,000 and 600,000 ounces per year at an all-in sustaining cost between $600 and $1,000 per ounce. The reserve is now increased to 6 million ounces at an average grade of 2.66. The previously announced increase in resources has been reduced due to this conversion. Just in 2020, Kumtor had an operating cash flow of $661 million and a free cash flow of $438 million U.S., showcasing the asset quality. We have continued our near-mine exploration program in 2021 with the goal to identify further extensions of the current pits, as well as nearby mineralization. Currently, we do not anticipate starting the underground exploration as current plans require access from the bottom of the central pit, which is currently an active mining phase. This opportunity continues to be analyzed and better understood. As a result of the additional reserves, the mine life is now extended from 2026 to 2031. The new life of mine reflects a $1.96 billion net cash flow at a gold price of $1,350. This increases to just over $3 billion at $1,600 gold. Minimal additional capital requirement exists, but we have focused capital improvements planned for the plants to increase recovery and throughput, including additional leach tanks and a new tower mill. Our new life of mine anticipates an increase in the Tailings Dam each year, as we have successfully managed over the past few years, positioning us well for ongoing operations. The near mine exploration drilling has outlined significant oxide potential. Future near-term drilling will focus on extending sulfide reserves and resources. The reserves have increased to over 6 million ounces, reflecting a strong conversion of resources to reserves. The 87% increase in reserves yields an additional five full years of production. At $1,350 gold for 2021, we anticipate a breakeven in terms of net cash flow. The year 2022 to 2026 forecast shows sufficient releases of ore to maintain steady grades above 3.1 grams per tonne. We expect to produce up to 600,000 ounces per year for these five years. From 2027 to 2031, the current plan anticipates feeding full tonnage but with a lower grade blend, averaging 330,000 ounces per year. Given our ongoing near-mine exploration, there is potential to bring forward higher grade blends in these years. The final year of the mine's plan includes higher grade ore from the Cut-back around year-end, which is anticipated to be accessed towards the mine's conclusion. The net cash flow from 2020 to the end of the mine life stands at $1.96 billion, well spread over the years. Centerra takes its stewardship of the Kumtor mine very seriously, making diligent efforts to fulfill its ESG obligations for the benefit of all stakeholders. Kumtor is a substantial tax contributor to the Kyrgyz state, having invested over $2 billion U.S. since inception, and paid over $1.4 billion in taxes, contributing significantly to the country's GDP. The extended life of mine is projected to contribute another $1 billion in taxes and royalties. Kumtor has a highly skilled national workforce, with only 1% of workers originating from outside the country. Competitive wages contribute to retention, with our payroll nearing $100 million per year. A large percentage of our nearly 4,000 employees and contractors live in the vicinity of the mine, with many promoted to roles in Canada, utilizing their world-class technical expertise. Kumtor supports local communities through various sustainable activities, female and youth employment, training, and other investments, establishing microcredit initiatives that have helped create about 5,000 new jobs. The extended mine life will contribute an additional $17 million in direct support for these initiatives. Regarding local procurement, Kumtor has embraced this goal, with over 25% of supplies procured locally from around 400 suppliers. Since inception, Kumtor has spent over $1 billion U.S. locally. Notably, 100% of food requirements for our 1,800-person camp are locally sourced. The additional mine life also means increased local procurements, nearing $7 million for the local economy. On environmental stewardship, Kumtor applies the highest standards in managing environmental impacts. We maintain transparency and continuously monitor site conditions. I’ll move now to slide 26 to address reserves and resources further. The reserves have seen an 87% increase from 3.2 million to 6 million ounces, reflecting an expansion of the Central pit. The report timeline shows the changes from the technical report dated July 1, 2020 to the announced reserve at year-end, indicating depletion of ore from stockpiles during the latter half of 2020. On slide 28, only a small expansion of the Resource Pit Shell is depicted, with only slight changes occurring on either side of the hockey stick zone and towards Cut-back ‘21 and ‘22. The total ounces in a resource shell have changed slightly, with the main change encompassing ounces shifting from resource to reserve. In slide 29, we see a sectional view over Cut-back ‘21 presenting lowered pit angles to ensure geo-stability during subsequent mining. The section on the left indicates that we are not making significant changes due to good stability in this area. Moving forward to slide 31, slides depict the open pit design plan, with the ultimate mining zones shown. We are currently mining Cut-back ‘20 until mid-2022 while transitioning about 25% of our efforts to southwest and 25% to the Hockey Stick beginning in 2021. Southwest is projected to be completed by 2023, while Hockey Stick will continue until 2025. Cut-back ‘22 is planned for after Hockey Stick concludes in 2026, wrapping up in 2028. In terms of fleet management for slide 32, Kumtor operates a large fleet of CAT haul trucks complemented by Liebherr and Hitachi shovels, all in excellent condition. Due to longer hauling distances, we project a requirement for an additional 29 trucks in due time. Kumtor procured 11 used 789 trucks from Chile in 2020 and ordered 10 new trucks from CAT. The first 11 trucks are operating on-site, and two of the new trucks have arrived, with the remaining in transit. Our ongoing productivity improvements have allowed us to postpone acquiring the final eight trucks unless necessary. Therefore, our 2021 capital expenditures are anticipated to be lower than specified in our technical report because these eight deferred trucks may be canceled. Regarding shovels, we plan to conduct a trade-in of four smaller Liebherr shovels for larger models, with further studies ongoing to finalize this plan. In the mining schedule, slide 34 shows the phased release of ore in the Central pit and the southwest. The Central-pit cut-backs will enable mining over two to three years. Most ore in these cutbacks is within their concluding year, necessitating the release of ore from the Hockey Stick and Sarytor during these larger stripping segments. Slide 39 presents Kumtor's main waste dumps, with Central handling 40% of waste and Sarytor and Lysii managing 30% each. The loading of these dumps is closely monitored to mitigate risks. Turning to the mill operations on slide 41, the process flow reflects the addition of a new Tower Mill, planned for commission in October of this year, with additional leach tanks projected for operation in Q2 of the current year. The Kumtor mill operates with a remarkable mechanical availability of 97%. We maintain a strategy of bi-annual full maintenance shutdowns, ensuring high mechanical availability. The plant plans to run at 6.5 million tons annually, with the addition of new tanks and the Tower Mill leading to recoveries anticipated in the mid-80’s range. Detailed plans for ore blending have been constructed by our metallurgical team to optimize recovery. We also look at the tailings storage facility on the following slides, showing that the current facility is robust. With the additional five years of operations, capacity will increase only slightly, as increases will allow for uninterrupted operations. The budget for tailings raising is spread out over the remaining life of mine, with construction contracted to local contractors, scheduled for completion during warmer months from April to October each year. Now, turning to financials in slide 47, the new life of mine reflects $1.96 billion in free cash flow at $1,350 gold price. From 2022 onward, we foresee five solid years at around $200 million free cash flow each at the same price level, expecting all-in sustaining costs between $650 and $900. The life of mine costs average near $828 per ounce. Mining costs were higher in 2020 due to reduced tonnage, but operationally, the mine may run at an average of $1.39 per tonne when full. When assessing net cash flow at $1,350, 2021 is characterized by larger stripping operations, requiring feeding from lower grade stockpiles. The NPV estimates are robust, calculated at $1.55 billion at a 5% discount rate, and $1.37 billion at an 8% rate, signifying strong project viability. The overall economics remain resilient to fluctuating gold prices and operating costs. Kumtor presents additional opportunities, what we term 'Golden Sunrise'. These prospects include opportunities such as improving recoveries and evaluating ore zones beneath the current plant footprint. Also included is consideration of pioneering mining methods like conveyors, aiding with waste rock transportation and integrating green initiatives. Our studies on recovering gold from tailings are ongoing, given our estimate of over 3 million ounces contained therein.

Thank you, Dan, and good morning to everyone. I’ll now briefly discuss the exploration completed at Kumtor in the recent past and outline the planned exploration for 2021 and beyond. On slide 55, exploration drilling resumed at Kumtor in mid-2018 after a five-year hiatus. Work in 2018 and 2019 focused on developing resources in the hockey stick and stop work zones, targeting mineralization beyond the ultimate open pits. In 2020, drilling continued with emphasis on extending sulfide mineralization at the southwest and Sarytor deposits, and assessing oxide gold mineralization potential along the Kumtor Lower Thrust at Sarytor, Hope, Triangle, Muzdusuu, and Northeast. Slide 56 outlines the extended mine life out to 2031, based on the updated reserves. There's significant prospective exploration in coming years, especially to mitigate the drop in ounces projected after 2027. Kumtor is a premier orogenic gold deposit located on the Tien-Shan Suture Zone in Southern Kyrgyzstan. Our exploration budget for 2021 is $21 million, aiming for 75,000 meters of drilling. We anticipate that there's significant potential to increase existing sulfide gold resources and discover new oxide gold resources within the Kumtor concession. We have conducted preliminary metallurgical test work, with promising recoveries exceeding 80%. Furthermore, the retreat of the Lysii glacier provides new opportunities to explore areas previously constrained.

Thanks, Malcolm, and congratulations to you and Dan for your team efforts. These developments are significant, and the exploration potential remains exciting for future growth. I’d like to conclude my comments before we move on to the Q&A. The strengthened life of mine plan for Kumtor illustrates increased company wide gold output levels. If we look at the all-in sustaining cost metrics, we see a robust cost structure that will bolster margins and enhance profitability. We're committed to delivering sustainable value and growth for our organization and shareholders. With that, Carlos, our operator, I’ll pass it back to you to open the floor for questions.

Thank you very much, sir. Our first question comes from the line of Fahad Tariq, Credit Suisse. Please go ahead.

Hi, good morning. Thanks for taking my two questions. First, on oxide and the difference between 2020 production and 2021 production. Can you provide more commentary on that? I know you’ve offered more guidance on grades and things like that, but were those grades expected to be lower than previously expected? Any insight on the cadence of production would be helpful.

Yes, it's Scott here. I'll begin, and Dan, feel free to provide any additional commentary. The change is primarily due to the grade. In 2020, we reported a stat grade of 1.4 grams per tonne, while for 2021 we are budgeting a stat grade of approximately 1.27 grams per tonne. That’s what drives the year-over-year profile. In terms of mine sequencing and phasing, as illustrated in our three-year outlook, we anticipate a very high-grade sequence commencing in 2022 and 2023, leading to significant increases in oxide production. So the answer fundamentally lies in the mine grade and its distribution.

Thanks for that. On capital allocation, I’d like to hear your recent thoughts regarding it. I know you previously mentioned evaluating distributions as a percentage of free cash flow. Is there any consideration for raising the dividend, and what would your thoughts on that be?

It's an ongoing discussion with our Board; it’s a constant agenda topic at each meeting. We’re consulting with our shareholders for their perspectives on the most effective capital return strategies. With the new life of mine study for Kumtor, we're also reaching out to the political leadership in Kyrgyzstan to gather their input as our largest shareholder, Kyrgyzaltyn. We’re considering numerous options, from share buybacks to enhancing our regular quarterly dividend. However, I can't provide specifics at this time as it's still evaluation.

Our next question comes from the line of Brian MacArthur, Raymond James. Please go ahead.

Good morning. I wanted to follow up on the Öksüt permit; there’s significant growth in that area. What remains to be done to secure that permit to access the higher grades in 2022?

Dan, could you address that question, please?

Certainly. Currently, the permitting timeline isn’t affecting the grades expected in 2021 or 2022. We have updated our environmental permit but are awaiting the final forestry footprint permit for the Güneytepe pit. If received earlier, we could access more ore from Güneytepe ahead of schedule, but right now, the timing of receiving that permit doesn't impact our three-year guidance.

So, I'm just confirming that issuing the permit for that pit is contingent; it could potentially accelerate access to higher grade ore?

We don’t have the plan for sourcing ore from Güneytepe in 2021 and 2022, due to the necessity of that forestry permit.

Our next question comes from the line of Trevor Turnbull at Scotiabank. Please go ahead.

Yes, thank you. I have a question regarding the Kumtor mine plan, particularly around mining costs. I know you mentioned longer haulage distances impacting the costs, but have unit costs increased? Can you provide a sense of the current costs in the new mine plan?

Dan, could you take that question?

Sure. Currently, we are seeing strong results. Our recent operations showed that January this year was well below the life of mine estimate. We conducted sensitivity analysis, and even with the longer distances of 1 to 1.5 kilometers each way, the additional cost impacts are minimal. Overall, we are operating substantially below the new technical report’s estimates.

That’s good to know. And could you share the unit cost in the new report?

Certainly, I believe it's $1.39 per tonne.

Thanks for that. I also wanted to touch base on reserve pricing; Kumtor is using $1,350, while other projects like Mount Milligan and Öksüt are at $1,250. Why the difference?

Trevor, just to follow up on that, yes, we have used $1,350 as a long-term gold price for our economic analyses, so there shouldn't be any inconsistency. That has remained consistent.

What about the other projects? Why not align them with the same long-term assumption?

The divergence is primarily because this year’s report pertains to a depletion from existing reserves rather than a complete reevaluation. The assumptions remained unchanged.

Next question comes from the line of Dalton Baretto, Canaccord. Please go ahead.

Thank you, operator. Scott and team, congratulations on what looks like a very robust medium-term outlook here. I have a couple of quick questions. Regarding the new Kyrgyz leadership, do you have a sense of their preferences on capital return? Are they happy with dividends at the corporate level?

Kyrgyzaltyn has historically preferred dividend distributions. They perceive an increase in dividends positively. However, we’re also assessing various potential measures like share buyback initiatives to return capital.

With Hardrock sold, is M&A on the table? Do these discussions relate to any future acquisition plans?

Currently, with the gold price environment, acquisition valuations are high, so we've focused primarily on internal execution. However, should a compelling acquisition opportunity arise, we would evaluate it, but for now our focus remains oriented toward our existing projects.

Next question comes from the line of Anita Soni, CIBC World Markets. Please go ahead.

Could you clarify if your ASIC includes stripping costs?

Yes, capitalized stripping is included in our all-in sustaining cost metric.

If ASIC includes those costs, what's the difference between all-in costs and all-in sustaining costs?

The difference includes the gross revenue-based taxes and additional growth capital for, largely, mining equipment expansion.

What is your dilution rate for resources going into reserves, and what do you need to integrate those resources into the mine plan?

We estimate a dilution rate of 8% to 10% in conversion from resources to reserves. The majority of the resources not currently in reserves lie outside the ultimate pit design based on current economic parameters.

What are the primary factors affecting whether those resources get converted?

It’s a combination of the gold price impacting stripping ratios, ultimately reflecting profitability in potential conversions.

What threshold would you consider for a new mill up there for oxide development?

We aren’t ready to address specific thresholds; we're still at preliminary stages assessing those opportunities. If that concludes the questions, thank you for your time today and we highly appreciate your attention. Please reach out if you have any further inquiries.

Thank you everyone for joining our call today. We will end the call now.

That concludes today’s call. We thank you for your participation and ask that you please disconnect your lines.