Centerra Gold Inc. Q1 FY2022 Earnings Call

Greetings and welcome to the Q1 2022 Results Conference Call. During the presentation, all participants will be in listen-only mode. Afterwards, we will have a question-and-answer session. As a reminder, this conference is being recorded on Wednesday, May 4, 2022. I would now like to turn the conference over to Toby Caron, Treasurer and Director of Investor Relations. Please go ahead.

Thank you, operator. Welcome to Centerra Gold's first quarter 2022 results conference call. Please note that presentation slides are available on Centerra'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 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 on the call today are Scott Perry, President and Chief Executive Officer; and Darren Millman, Chief Financial Officer. I would like to caution everyone that certain statements made today may be forward-looking statements and are subject to known and unknown risks, which may cause our actual results to differ from those expressed or implied. Also, certain other 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 material assumptions, risks, and uncertainties, please refer to our news release and MD&A along with the unaudited financial statements and notes and all of our other filings, which can be found on SEDAR, EDGAR, and on the company's website at centerragold.com. And now, I'll turn the call over to Scott.

Thank you, Toby, and a very good day to everyone. Thank you for joining us for our Q1 earnings conference call. Just referencing Slide 4 of the accompanying presentation deck and just referencing the bullet points on the top left, I think we had another good quarter in terms of metal production. You can see during the Q1 period, we produced just under 94,000 ounces of gold and some copper production of approximately 20.6 million pounds. This is a good level of metal output. You see that in the third bullet point just in terms of our corresponding all-in sustaining costs. For the quarter, we were producing our gold at a very competitive, very low $395 per ounce. And again, in parenthesis, you can see the individual contributions at the individual mine site; Mount Milligan produced its gold as low as $15 per ounce and Öksüt produced its gold as low as $451 per ounce in terms of the all-in sustaining cost metric. Mount Milligan is really benefitting from the strong copper price environment where we take those copper revenues as a byproduct, and that's what's resulting in those very low all-in sustaining costs per ounce. Just in terms of some key developments during the quarter. First of all, referencing the fourth bullet point, back in February, we announced the acquisition of the Goldfield District Project in Nevada. We think this is a very exciting addition to our portfolio and our project pipeline moving forward. We believe this is going to be a key source of organic growth for Centerra moving forward, and most likely will be our proverbial third leg to our stool. This year, the plan is really focusing on drilling and exploration as we make our way into 2023. We want to be in a position to publish a renewable resource on the property as well as a feasibility study which we'll be looking to underpin a potential future construction decision. The fifth bullet point here just in terms of Öksüt and the identification of mercury within the mineralogy, we're continuing to conduct several studies in terms of identifying potential technical solutions to remediate this challenge. They are under evaluation as we speak in addition to alternative means for monetizing our loaded gold in carbon, and I'll talk to this more in a future slide. Lastly, on the last bullet point here on the bottom left, during the quarter, another key development on April 4 was when we entered into the global arrangement agreement with Kyrgyzaltyn and the government of the Kyrgyz Republic. This has been a very important development in terms of resolving the Kumtor issue. I think this will be a good development for Centerra just in terms of us establishing a clean exit and moving forward with our business. Just on to the next slide on Slide 5, a number of highlights here. I won't speak to them all. Just the first bullet point, from a safety perspective, we had a very good quarter in terms of our All-Injury Frequency Rate; we're actually operating below target. We also had a number of milestones during the quarter which gives us confidence that we can operate in an environment of zero harm. One of the particular milestones was at Öksüt where we achieved 1 million hours of lost time incident-free operations. I definitely want to commend the leadership team at Öksüt. Again, a number of highlights here. Again, I'll just reiterate the third last bullet point. We're seeing very good levels of productivity and unit cost efficiency. Given the strong metal output, you can see the results in all-in sustaining costs per ounce; we're operating at a very low, competitive $395 per ounce. Just moving on to the next slide, on Slide 6, just in terms of our Environmental, Social and Governance profile, again, a number of bullet points here just providing updates and some of the key initiatives during the quarter. Again, the first bullet point in terms of safety, obviously this is absolutely paramount. That key milestone that we achieved at Öksüt is indicative of our focus on obtaining a zero harm environment. I do want to touch on the third last bullet point. Centerra Gold is a member of the World Gold Council. Some two to three years ago, the World Gold Council rolled out its responsible gold mining principles, which is essentially a set of 52 Environmental, Social and Governance principles. We as an association, we as an industry are looking to demonstrate full compliance with these principles by 2023. As part of this program, we did our year two assurance at our site and I’m pleased to report that we're in excellent stead in establishing compliance with these principles, so in very good stead for achieving the targeted deadlines. Just moving on to Slide 7, just looking at Mount Milligan in a little bit more detail. The first bullet point, as I mentioned earlier, Mount Milligan had a very good quarter with regards to metal output, especially in terms of copper production, which was fortuitous given the strong prevailing copper price environment. This strong level of metal production translates to corresponding all-in sustaining costs per ounce; again producing our gold as low as $15 per ounce, really benefiting from the strong copper price environment and the volume of copper byproduct revenues that we're recognizing. One of the key capital projects we have been working on at Mount Milligan is installing a new stage flotation circuit. We believe this can add 1 to 2 additional percentage points of recovery on our gold and copper. Construction of this circuit has been underway for some time now, and we're now in the commissioning phase, so we expect to have this circuit commissioned here in Q2 of this year. This should be beneficial just in terms of underpinning stronger gold and copper recovery efficiency rates moving forward. Just the fourth bullet point, the team continues to work on the new 43-101 life of mine plan or the technical study for Mount Milligan. Those who follow Centerra may recall that we had a lot of success at Mount Milligan last year in terms of growing our gold resources and our copper resources. We're focusing on converting as much of that new mineralization into reserve category, which we believe will underpin a meaningful extension in Mount Milligan's delineated reserve asset life. So that study is on track, and we expect to publish that during the Q2 reporting period. Just onto the next slide, on Slide 8. At Öksüt right now, we are operating at full capacity; be it our mining activities, stockpiling activities, crushing, stacking, irrigation, and leaching activities. All of that is continuing at full capacity, and we're continuing to convert our ore into loaded gold in carbon form, which we're currently storing and stockpiling in a secured manner. In the interim, what the team is doing is working on several potential engineering technical solutions in terms of upgrading the ADR facility where we process our gold. So we're looking at remediating some of these challenges to ensure that we can remove the mercury and continue to pour gold on site. In parallel, we're also in discussions looking at alternative means of monetizing our gold in carbon, and we're in talks with some offsite treatment facilities about whether that is a potential solution in the short term. I think we're going to have a more meaningful update on this during the quarter, and we'll look forward to reporting back on that shortly. The last bullet point here, we continue to focus on all of our productivity, our unit cost efficiencies; big focus on trying to lower our costs even further at Öksüt. As you would have seen, Öksüt had a very strong quarter during Q1; they produced about 54,000 ounces of gold, which resulted in competitive all-in sustaining costs of $451 per ounce. The mine continues to perform really well as we move into early Q2. Our productivity and unit cost efficiencies absorbed gold operations are performing in line with target if not ahead of target. With that, I'm now going to pass the call over to Darren Millman, our Chief Financial Officer, and Darren will dive into some of the financial highlights a little bit more.

Thank you, Scott, and good morning all. For those following on the slide deck, we're on Slide 9. Centerra recorded $295 million in revenue during the quarter, consisting of the Mount Milligan mine, the Öksüt mine, and our Molybdenum business unit. Revenue consisted of $156 million in gold sales, $68 million in copper sales, and $58 million from the Molybdenum business unit. In the quarter, our continued operations sold 94,908 ounces of gold—40,204 ounces from Mount Milligan and 54,704 gold ounces attributable to the Öksüt mine. We also sold 19.4 million pounds of copper during the quarter. The company's operations averaged a gold price realized of $1,687 per ounce and $3.77 per pound of copper, incorporating the existing streaming arrangements over the Mount Milligan line. Cash provided by operating activities from continuing operations was $28.3 million for the quarter. As noted in the MD&A, the Mount Milligan mine recognized four copper/gold shipment sales in the quarter but only received three provisional cash payments. In the second quarter, we will receive the fourth shipment's provisional cash payment of $42 million. Free cash flow from continuing operations for the quarter was $9.1 million, once again impacted by the timing of the Mount Milligan fourth shipment cash receipt and the negative free cash flow of $20.1 million from the Molybdenum business unit. We forecast positive free cash flow at the Molybdenum business unit for the remainder of the year with the release of working capital and reduced costs. At an operational level, the Mount Milligan mine generated $6.4 million in free cash flow for the quarter, while the Öksüt mine generated $61.4 million in free cash flow. The Öksüt mine's continuing operating activities of mining, stockpiling, crushing, stacking, and leaching activities align with our 2022 plans up until gold in carbon production. The adjusted net earnings per share was $0.19 for the quarter. I'll just move over to Slide 10. The net earnings from continuing operations were $89.4 million for the quarter, with $56.4 million in adjusted net earnings recorded. The earnings in the quarter attributable to operations were $45.6 million contributed from the Mount Milligan mine, $67.4 million contributed from the Öksüt mine, and a $6.4 million loss from the Molybdenum business unit. For the quarter, there were several adjusting items of significance as noted on this slide, particularly the Kumtor mine legal and related costs of $6.5 million and the reclamation provision adjustment on care and maintenance sites of $42 million, primarily due to the risk-free interest rates applied to underlying liabilities. Just moving over to Slide 11, from a cost perspective, Centerra's continued operations in the quarter recorded production costs of $4,497 per ounce, all-in sustaining costs on a byproduct basis of $395 per ounce. At an asset level, Mount Milligan recorded all-in sustaining costs on a byproduct basis of $15 per ounce. The $75.5 million in copper credit was a significant contributor to this very low cost performance. The Mount Milligan guidance remains unchanged at $575 to $625 per ounce for the year, with a targeted gold production of between 190,000 to 210,000 ounces of gold, and 70 million to 80 million pounds of copper. Öksüt recorded all-in sustaining costs of $451 per ounce for the quarter. As noted in the MD&A, the Öksüt guidance is currently under review with several technical options being evaluated, along with monetization options review, both in the short term and potentially life of mine. The company exited Q1 with a cash balance of $768 million, a reduction in cash balance compared to Q4. This is attributable to the $176 million acquisition of the Goldfield Project in Nevada. Given our strong financial performance and our free cash flow expectations, the Board declared a quarterly dividend of $0.07 per share. Finally, I draw your attention to the middle table on this slide. The company expects gold production at these levels in the form of gold in concentrate at the Mount Milligan mine and gold in carbon at the Öksüt mine. We plan to announce operational plans to address the mercury issues experienced, along with updated guidance in Q2 reporting. With that, I'll pass it back to Scott.

Thank you, Darren. So just on the last slide here, on Slide 12. As I spoke to earlier, looking at the bullet points on the top left, I think it was a good quarter in terms of metal output. In the third bullet point, you can see the business is performing really well from a fiscal perspective. Again, very low competitive all-in sustaining costs of $395 per ounce, and that's really underpinning the strong profitability that we reported during the quarter. As we've highlighted, we've got a very strong financial foundation here. In terms of the balance sheet, we finished the quarter with net cash of approximately $768 million. With the addition of our undrawn revolving line of credit facility, we had liquidity of approximately $1.17 billion. That certainly allows us to advocate continuing to operate an internally fully funded business model moving forward. The last two bullet points here on the bottom left also highlight new developments that we will be expecting to report on in Q2. Firstly, in terms of Öksüt and what solution we'll be embarking on. We expect to have news on that shortly during the Q2 period. With the resolution agreement with the Kyrgyz Republic, as we've mentioned in our disclosures today, we expect to close that in the Q2 period. Another point I'll draw attention to is the 43-101 study that's underway at Mount Milligan. Again, we expect to finalize and publish that in the Q2 reporting period. Lastly, from a management update perspective, you would have seen in today's release that we announced Dan Desjardins has retired as the company's Vice President and Chief Operating Officer. We offer our sincere thanks and gratitude to Dan for his dedication, leadership, and contributions to the strategic direction of Centerra during his many years of service since he joined the company in 2015. Under Dan's leadership, first as President of Kumtor Gold Company and subsequently as Vice President and Chief Operating Officer, and through his enduring passion for continuous improvement, the Kumtor mine was elevated to world-class status. More recently, the construction of the Öksüt mine was delivered on time and under budget and has since fully repaid its upfront investment within its first two years of commercial production. So again, I want to express our thanks to Dan for his contributions to Centerra over the years, and we wish him well in his retirement. An international search firm has been engaged to identify Dan's successor. That concludes our prepared remarks. Beatrice, our operator, if I can pass the call back to you to facilitate the Q&A session, please.

Thank you. Our first question comes from Trevor Turnbull with Scotiabank. Please go ahead with your question.

Thank you. And thank you, Scott. Congratulations on the EA amendment up at Mount Milligan. You mentioned that long-term water is now secured for the life of the deposit or for the project. I just wondered, does that statement include any potential changes that might come with the new mine plan?

Yes, Trevor, thanks for that question. Yes, I believe that statement does allow for any additional mine life that's going to be delineated with the new 43-101. So the answer is yes.

Okay, great. And then a question on Öksüt. As you work out a solution for the mercury there, how should we think about accounting for costs in Q2? Will you be able to defer some of the costs until gold production and sales take place, or will the costs be tied to lower sales and potentially be abnormally high for Q2?

I'm looking at Darren. Darren, do you want to respond to that?

Yes, Trevor. We envision a buildup of inventory, so gold in carbon inventory on our balance sheet. We don’t anticipate too much flowing through our profit and loss or income statement. There might be some idle costs associated with the gold room, but we don't believe that will be material. That's how you'll see the flow through in, hopefully, just Q2.

That's fine. And then maybe a bigger picture question regarding Öksüt. I noticed in the forward-looking statements that you talked about deposits in support of an updated resource and new life of mine plan. Is that boilerplate forward-looking statements or should we be watching for an updated mine plan and resource sometime soon?

No, Trevor, it's Scott. I don't think we'll be providing or publishing any new resource or life of mine plan in the short term.

Okay. And my very last question is about the Moly business and again pointing to those forward-looking statements, there was a reference to potentially restarting or divesting the mining operations. Could you share your thoughts on the potential for a restart of mining, the timing it would need, or the type of investments required if you went that route?

Yes, Trevor, it's very preliminary right now. My team and I, along with our technical team, are working on new feasibility studies, or reactivation studies for both the Thompson Creek Mine and the Endako mine. We're trying to understand the potential economic benefits, the value proposition, and the required upfront capital cost. What's generating these studies is the prevailing Moly prices, which have been trading consistently around $19 to $20 per pound. We're also seeing more external supply-demand analysis suggesting that this level of Moly pricing could continue. So understanding the economic benefits is crucial, which is why we need those studies. If we find deep value here, it could inform discussions regarding divesting the Molybdenum business unit as we've seen interest from third parties.

Yes, that makes sense. Do you have a sense of timing for how long until the studies would be available?

It's not something we've committed to publishing externally. This is more an internal focus within our organization. However, I’d like to think that myself and the broader management team will have a final product to discuss with our Board in the next sort of three to four months, hopefully.

Okay. Just one quick follow-up on that. Since you continue to process some product through Thompson Creek, does that give it a bit of an edge in terms of being simpler to reactivate compared to, say, Endako?

Yes, both concentrates historically produced from the Endako mine and the Thompson Creek mine were of high quality, which enables additional margins recognized at the Langeloth Metallurgical facility in Pittsburgh. So, I think we will enjoy benefits from either mine. We're doing those studies to understand prospective value, as Scott mentioned. If we do make a decision to restart either mine, we plan to maintain our existing business model of purchasing third-party concentrates and elevating those for sale in the steel and chemical industries. Therefore, the more throughput we can get through the Langeloth facility, the higher margins we can achieve overall as a business unit. It's more of an add-on, Trevor, is how I see it.

I really appreciate the color and look forward to your updates. Thank you.

Our next question comes from the line of Michael Siperco with RBC Capital Markets. Please proceed with your question.

Thanks very much, Scott and team, for taking my questions. A couple of follow-ups, but maybe first just on the free cash flow number this quarter. Just to be clear, this is an understated number on the timing of that cash received at Mount Milligan, correct? In other words, we should expect a reversal of that increase in Q2; assuming it had been received in Q1, the free cash flow number would be closer to $60 million. Is that about right?

Yes, that's in the ballpark.

Okay, very good. Following up on Öksüt, so am I understanding that in terms of production in Q2, we shouldn't expect any gold pour, just a buildup of inventory of gold in carbon for Q2. Is that correct where we stand today?

Michael, it's Scott here. That's a difficult question for me to answer right now. As Darren stated in his remarks, we do expect to provide a further operational update on Öksüt soon. The challenge lies in that one option we are considering is monetizing our loaded gold in carbon at an offsite treatment facility, and we're currently discussing this with principal depth. They've assured us that they have the necessary infrastructure, installations, technology, and capacity to handle our loaded gold in carbon. We're in the final stages of negotiations regarding what that solution would look like. If this comes to fruition, then we could be producing gold throughout the quarter. However, we're not quite there yet. Thus, it's challenging to give a definitive answer at this point.

Okay, fair enough. And I guess one more on Öksüt. You referenced the potential solution of shipping gold in carbon over the life of mine. Whether via this option or due to whatever decisions are made, does anything change in your thinking about the deposit long-term with respect to capital allocation, exploration, mine life extension, those aspects you discussed last year, or is it too early to tell?

If I'm understanding the context of your question, nothing changes regarding our view of resources, reserves, or the life of mine profile, or how we will phase, sequence, and develop the deposit. Everything remains the same.

Got it. If I can just ask one more question. I suppose Trevor covered the Moly business. I’ll ask about Kemess. Any updated thoughts regarding Kemess as a project or potential divestment?

No. We've got no update, Michael.

Copy. Got it. Thanks very much. Those are my questions.

Thank you.

Our next question comes from the line of Anita Soni with CIBC. Please proceed with your question.

Good morning. Thank you, Scott, for taking my call.

Anita, I apologize. You're breaking up at our end. Operator, was that breaking up at your end as well?

Yes, it was.

Okay, sorry. Can you hear me?

You're coming through much better now, Anita, I think.

Okay. So I was just asking whether you could hear me.

Anita, I'm sorry. I'm going to frustrate you. You started breaking up again.

No worries. It's okay. We’ll take it offline.

Okay. Sorry, Anita.

Our next question comes from the line of Brian MacArthur with Raymond James. Please proceed with your question.

Good morning. Again, most of my questions have been answered. But can I just follow up on the Moly business? There was a statement made that there will be positive free cash flow for the rest of the year. It was sort of negative $20 if I calculate this right in the first quarter, and your guidance originally was consuming $15, I think, for the year. When you say it will be positive for the rest of the year, does that mean positive on a quarterly basis? You haven't changed your forecast that you're actually going to recover that whole $20 million?

So we don't anticipate changing our guidance. The only real change we're anticipating now is the release of additional working capital. You noted, Brian, in the quarterly analysis, we referenced working capital in excess of $100 million. We're aiming to release more of that than planned for the 2022 year. So that's where the expectation for free cash flow generation comes from; a lot of it's about releasing working capital. We do anticipate being close to breakeven cash flow.

Great, that's what I was trying to get at, the actual cash. Assuming that all assumes no money being spent on restarts or anything? That's just the ongoing business covering care and maintenance costs plus the release of working capital, right?

That's right.

Mr. Perry, there are no further questions at this time. I'll turn the call back to you. Please continue with your presentation or closing remarks.

Okay. Thank you, operator, and thank you everyone for joining us for the call. We'll conclude it there, and I wish everyone a very good day. Look forward to catching up soon. Thank you.

That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.