Centerra Gold Inc. Q1 FY2023 Earnings Call

Greetings and welcome to the Q1 2023 Results Conference Call. As a reminder today's call is being recorded on Monday, May 15, 2023. 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 2023 results conference call. Please note that presentation 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 instructions for asking a question, and then we'll open the phone lines to questions. Please note that all figures are in U.S. dollars unless otherwise noted. Joining me on the call today are Michael Parrett, Chair of the Board of Directors; Paul Tomory, President and Chief Executive Officer; Paul Wright, Director and former Interim President and Chief Executive Officer; and Darren Millman, Chief Financial Officer. Our Chief Operating Officer, Paul Chawrun, is traveling and unable to attend. 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 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 unaudited financial statements, 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 Mike.

Thank you, Toby, and good morning, everyone, and thanks for joining our call this morning. My purpose here today is twofold. First, on behalf of the Board and all shareholders, I'd like to express our appreciation to Paul Wright for his leadership of Centerra as the Interim President and CEO over the past 8 months. As you know, Paul was appointed to the position in September of last year. And since then, he's been extremely busy. Under Paul's leadership at the Öksüt Mine, we completed the construction of the retrofit of the ADR plant. We've obtained several important outstanding permits. We filed a new environmental impact assessment and we've advanced materially towards the restart of operations. At the Mount Milligan mine, during his tenure, we completed a new length of line plant, which extended the life of Mount Milligan by 4 years until 2033. From a business perspective, Paul streamlined the corporate organization. He's actively been engaged in communicating with our shareholders, addressing our near-term challenges and outlining the strategy for growth as we move forward. During this time, we also implemented a normal course issuer bid, which has provided us with a second option for returning cash to shareholders. Paul has also provided great insight and assistance to our new CEO, as he goes through his onboarding process. Paul has now returned to his role as an independent director of Centerra, and shareholders will continue to benefit from his experience, insight, and input on the Board. My second important duty this morning is to welcome Paul Tomory as Centerra's new President and CEO. Paul started with Centerra on May 1 of this year. Many of you already know him. But for those who do not, he brings over 25 years of experience in mining, engineering, construction, and corporate development. With his extensive technical background, we are confident that Paul Tomory is the right leader for the company. This is an important stage for Centerra and its journey as a company, and we are delighted to have Paul join us at this time. Welcome, Paul. And with that, I'll turn the call over to you.

Thanks very much, Mike, and good morning, everyone. It's only been a couple of weeks, but having spent time with our corporate and site teams and having had a chance to visit Mount Milligan, I'm excited for the future of the company. Over the weeks and months ahead, I look forward to visiting Öksüt and our U.S. assets as well as engaging with our many shareholders and other stakeholders. I know a lot of our investors and analysts are eager to hear what the strategy is going forward. Given my brief time in the seat, I can offer a roadmap of what the company's short-term focus will look like over the next 100 days or so; here are some of those highlights. First and foremost, our top priority will remain a focus on safe and environmentally responsible operations. Next, we will continue to drive operational and technical improvements in Mount Milligan with a focus on delivering the newly optimized life of mine plan. Finally, pending regulatory approval, we expect to ramp up safe and environmentally compliant operations at Öksüt and realize near-term cash flow through the drawdown of accumulated inventories. Shifting to our development assets in light of strong molybdenum prices and an assessment of profitability and cash flow potential, our objective is to advance and articulate a strategy for the entire molybdenum business. At Goldfield in Nevada, we will continue to advance technical studies and exploration work, with the objective of delivering an initial resource by the middle of 2023. Finally, we will advance study work at Kemess with the objective of determining the asset's position in the overall portfolio. Moving on to the quarter, the company reported first quarter production of 33,000 ounces of gold and copper production of 13 million pounds. The production results were impacted by several factors, mainly driven by lower grade due to plant sequencing and mine, lower plant throughput from a planned maintenance shutdown, and issues surrounding the handling of material throughout the winter months. Darren will speak in more detail about the Mount Milligan results and provide an update on the Öksüt Mine later in the call. The company continues to evaluate strategic options for the molybdenum business, including a potential restart of the Thompson Creek mine based on the long-term outlook for strengthening molybdenum prices. As mentioned, I intend to visit the molybdenum assets in the coming weeks and look forward to learning more about the operations. Meanwhile, the work being done on the PFS for a potential restart of the Thompson Creek mine is on track. At the Goldfield project, drilling was significantly advanced in the first quarter, and the company expected to deliver an initial resource by midyear. There are a number of ESG initiatives that Centerra is working on, and as I continue to grow my knowledge and understanding of all the good work underway, I will certainly be able to provide more detail. That said, today, I will touch on a few highlights. First, as mentioned, is safety. A number of sites achieved safety milestones this quarter. Mount Milligan achieved 1 million hours without a lost time incident, and Thompson Creek achieved 1 year without a reportable incident. Second, after having completed the full rollout of the responsible gold mining principles last year, Centerra is on track to receive its full conformance report, which will be integrated into this year's annual ESG report. Finally, Centerra continues to make progress on the development of its climate strategy, aligned with the recommendations from the task force on climate-related financial disclosures. And with that, I'll pass the call over to Darren to walk through our operational and financial highlights.

Thanks, Paul, and good morning, all. For those following along from the WebEx, I am initially speaking to Slide 8. The Mount Milligan mine produced 33,215 gold ounces and 13.4 million pounds of copper. Due to mine sequencing, the first half of the year was expected to be lower-grade ore, with Q1 being the lowest, and higher grades are expected in the second half of the year. However, several additional factors impacted Mount Milligan's production in the first quarter. Phases 7 and 9 are on the outer edges of the ore body, with the transitional zone between oxide and sulfide ore larger than expected, resulting in lower grades and necessitating lower grade stockpile in its place. The lower grade ore caused lower metal recoveries, and we encountered material handling challenges in the plant throughput during the winter months. We are currently transitioning deeper into the transitional zone in these areas, which we do not expect to continue. There was also a planned mill shutdown in February, and our next major shutdown will occur in August. You will note in the bottom table, far right column, the column heading grades were 0.17% in the quarter, which is a 10% decrease from the fourth quarter of 2022. The gold head grades processed were 0.34 grams per tonne, a 28% decrease in grade compared to the third quarter of 2022. On a positive note, the mine material movement was on plan, and as a result, we remain on track to access the higher-grade copper and gold ore in the second half of the year. In Q1, the Mount Milligan team mined 11.3 million tonnes of material, an 11% increase compared to Q4 2022. Due to lower-than-planned metal production during the first quarter, we now expect the 2023 gold production to be near the low end of guidance, while 2023 copper production is tracking towards the midpoint of guidance. As mentioned earlier, Mount Milligan mine's 2023 gold production and copper production is expected to be back-end weighted, driving a higher proportion of concentrate sales in the fourth quarter of 2023. The company anticipates that approximately 30% to 35% of concentrate sales will occur in the fourth quarter of 2023. In Q1, cash provided by mine operations was $28 million, and free cash flow from mine operations was $25 million. Gold production cost was $1,124 per ounce, and all-in sustaining costs on a byproduct basis were $914 per ounce. On the exploration front, we continued drilling and anticipate an updated resource this year that will include assay results from nearly 50,000 meters completed in 2022. I'll now be speaking to Slide 9. On Slide 9, we provide an operational update for the Öksüt Mine. The regulatory review of the Öksüt Mine's Environmental Impact Assessment remains on track. The company completed its technical review meeting with local authorities at the end of March and posted its EIA for public comment in late April with no significant comments received. With all the reviews complete, the EIA has been submitted for final ministry approval. The mercury abatement retrofit at the ADR plant was completed in January. This system was tested in March under the supervision of Turkish authorities. 2023 mining activities at Öksüt will be focused on Phase 5 wall pushback to expand the certificate and continuation of mining in the Keltepe pit. Waste stripping was also restarted in the quarter, which is to be capitalized. As of March 2023, all processed and stored golden carbon inventory is approximately 100,000 recoverable ounces, with an estimated additional 200,000 recoverable ounces on the heap leach pad and in stockpiles. I'll now be speaking to Slide 11. Centerra recorded $226 million in net revenue during the quarter, consisting of the Mount Milligan Mine and Molybdenum Business Unit. No revenue was recorded at the Öksüt Mine. At the Mount Milligan mine, gross gold sales and copper sales were $56 million and $52 million, respectively. In the quarter, Mount Milligan sold 38,990 ounces of gold and 15.3 million pounds of copper. The average realized price was $1,446 per ounce of gold and $3.42 per pound of copper. This incorporates the existing stream over the Mount Milligan mine. The cost associated with the Öksüt stored golden carbon inventory is approximately $450 per ounce, which has been capitalized to the current asset within inventory. At the Molybdenum Business Unit, approximately 3.3 million pounds of molybdenum were sold, generating $116 million with an average market price of $32.95 per pound of molybdenum. I'll now speak to Slide 12. The net loss from continued operations was $73 million during the quarter, with $53 million in adjusted net loss recorded. The earnings in the quarter attributable to operations were a $9 million positive contribution from the Mount Milligan mine. As noted earlier, lower production in Q1 was expected compared to preceding quarters and minimal operating capital expenditure for the construction of the tailing storage facility. A $10.8 million loss from the Mount Milligan mine was recorded, including $7.8 million in standby costs, while a $26.3 million loss from the Molybdenum Business Unit was recorded, along with $11.7 million in evaluation costs for gold recorded with the front-end expenditure as we plan to deliver a mineral resource update midyear. For the quarter, there were two adjusting items: reclamation expense and care and maintenance costs of $15 million associated with underlying rehabilitation and discount rates applied, along with a $5 million tax expense resulting from the introduction of a one-time tax leveled by the Turkish government on taxpayers eligible for certain investment certificates in 2022. Production costs capitalized to the storage facility step-out in the first quarter was only $300,000, which is lower than usual for the quarter due to the timing of step-out activities. The company expects total production costs capitalized to the TSF for the full year to be in the range of $12 million to $14 million as step-out activities return to more normal levels in future quarters. Now I'll be speaking to Slide 13. Cash used in operating activities was approximately $100 million for the quarter, resulting in a $105 million free cash flow deficit in the quarter. During the quarter, the Molybdenum Business Unit used $76 million in cash, primarily due to a buildup of working capital of $66 million. The increase in working capital was driven by an additional 0.8 million molybdenum price held in inventory at the end of March, together with an underlying average molybdenum price increasing to $32.95 in Q1 compared to $21.49 in Q4 2022, representing a 53% increase in the underlying price. As noted in the MD&A, the Mount Milligan Mine recognized $28 million in positive operating cash flow and $25 million in free cash flow for the quarter. Given there were no sales occurring in the Öksüt Mine in the quarter, operations used $24 million of treasury, which was in line with guidance of $7 million to $10 million in cash expenditures per month until operations recommenced. As you can see in the graph on the lower right table, total working capital balance at the end of the quarter was $255 million, a $60 million increase compared to the end of December 2022. This is materially driven by the increase in the Molybdenum Business Unit. We expect this to reduce to normalized levels if current molybdenum prices remain stable in Q2 and Q3 of this year. The company exited Q1 with a cash balance of $412 million and over $800 million of liquidity. Given our strong financial position, the Board declared a quarterly dividend of $0.07 per share. Finally, I would like to end by thanking Toby Caron, our Director of IR. At the start of 2022, Toby took on both Treasury and IR responsibilities. 2022 was an extremely busy year at Centerra as the company transitioned away from the previous phase. His commitment to both the company and responsiveness to analysts and shareholders was commendable while continuing to oversee treasury. Toby continues to be a key member of the engagement team and now will focus on treasury and risk management strategies for the company. At this time, I'd also like to welcome Lisa Wilkinson, our new VP of IR and Corporate Communications. That concludes our prepared remarks. Moderator, please open the call for questions.

Thank you very much. And our first question on the line is from Mike Parkin with National Bank. Go ahead.

Hi, guys. Can you just speak to some of the moving parts that resulted in the OpEx reported at Langeloth being up significantly, like $30 million quarter-over-quarter, but it seems kind of like $88 million in the fourth quarter? I've noticed it's been climbing. Is there any kind of clarity in terms of what's driving that and where you would expect it to trend going forward?

Hey, Mike, it's Darren. Thanks for the question. When you look at Q4 2022, the same inventory levels remained relatively the same. We did have a $0.8 million increase in inventory. But the big driver is purely price. For molybdenum, it topped in Q4 at approximately $38 a pound. It's come down to $22. We do a mark-to-market at the end of every quarter. So we see that released in Q2 and Q3. We don't see it continuing on. We've given guidance in our disclosures for the Molybdenum Business Unit; for the total business unit, we're ranging between $45 million to $80 million. That large range represents the change from $20 to up to $35 a pound. It's important just to highlight that Langeloth is really the business unit that has these swings. Unfortunately, we can't lock in hedging for that. It's great when molybdenum prices are up, as it makes the economics more attractive for the underlying business unit of Thompson Creek, but it does impact our working capital all by itself. As part of the review we are looking to present to the market in Q3, we'll be looking to see whether we need to make some changes at Langeloth.

Okay. And just in terms of some of the optimization you know, discussing Mount Milligan? Is it kind of early days, or is there any kind of clarity on where you see some low-hanging fruit to work on?

I think the team, from an exploration perspective, I'll speak to that first. So we have 50,000 meters of drilling in 2022 that hasn't been incorporated into the technical information we reported last fall. So we are looking at whether what we've seen could potentially increase the mine plan, and does it allow us to bring forward some additional high-grade zones? This is something we're looking at for 2024 and 2025. At the moment, we're not looking at any significant capital expenditure for adjustments in the mill. As you know, we completed the refurbishment last year. We're seeing the benefit of that, and obviously, looking to capture a full year of potential increases in recoveries. But the team is also focusing on blend and ensuring we're getting the right mix of high-grade copper, high-grade gold, low copper, and low copper, high gold. So we're really focusing on those pieces at the moment. There's nothing beyond those items at this stage, but with Paul T and Paul C working together, I'm sure there's some low-hanging fruit that we'll be addressing next year.

Okay. And what's the word on Öksüt in terms of whether the elections in the country are kind of taking up the Ministry's time, and you'd expect a response following the resolution of the elections? Or just any kind of additional clarity you can provide on the process of getting that EIA approved?

We'll pass that one on to Paul Wright, please.

Yes, certainly, Paul. Very quickly, we've been making good progress concerning bringing Öksüt back online by advancing the process, completing construction of the mercury abatement system, and having it tested and approved by inspections from the Ministry of Environment. The EIA document, which is a critical precursor to obtaining ministry approval, has been advanced, with the public posting period concluding April 30. Last week, we received acceptance of the EIA report from the Ministry of Environment. We're now at the point of attaining ministerial approval, concluding with the granting of a certificate. As I described, the precursor to that was the acceptance of the EIA, allowing us to move forward with the request for ministerial approval. However, the process was impacted by the early elections held yesterday. As you can appreciate, the week before elections, it is difficult to attract ministerial attention to these matters. We're optimistic that with the first round of elections behind us and the government still in place pending the second round, we will be able in the coming weeks to complete this task and obtain the certificate and move forward with the local authorities to bring the mine online. Again, there has been significant progress regarding the acceptance of the EIA report, and we continue to enjoy strong local support for the restart.

It definitely looks like you guys are making great progress, and there seems to be a lot of opposition at all voices. Is there any clarity on how the Ministry works with respect to elections? Is the Ministry in place expected to stay in place, or would there be a new Ministry appointed regardless of the outcome of the presidential elections?

Look, I don't want to speculate on the results of the election. If the ruling party succeeds, the civil service will probably largely remain intact. You will see changes at the ministerial level inevitably, as it's fairly typical. We see this occur in this instance where the minister looks to take up a seat in parliament. Therefore, you would see some changes in terms of leadership of the ministry. But in the event of a change in government, which looks unlikely given the results of yesterday, then you would have seen more changes. I must emphasize that we are making very good progress resulting in the acceptance of the EIA report, along with strong local support for the project. We just ran out of runway due to the call for early elections.

I understand. That's it for me, guys. Thanks very much.

Thank you very much. And our next question on the line is from Anita Soni with CIBC Markets. Go ahead.

Hi, good morning, everyone, and thanks for taking my questions. Firstly, Paul Tomory, congratulations on your new role as CEO, and I look forward to working with you. I believe Mike asked most of the questions, and Paul Wright provided good clarity on Turkey. So I guess my question is more of a housekeeping item. I'm looking at the exploration costs for the Goldfield project, and you spent a lot there relative to the $10 million that you were forecasting. Do you anticipate an increase, or did you just finish your drilling campaign early?

Anita, it's Darren. No, we simply front-end loaded the expenditure on Goldfield, and we are not expecting those expenditures to continue at that level.

Okay. And then in terms of the cost guidance for Mount Milligan, that was reiterated, but it seems like you're saying you might be below the low end. I'm not sure when you said that on the production side; you mentioned it was near the low end. So I'm assuming that means below the low end of the guidance range. How is it that the costs are still okay going forward? Can you provide some clarity on that?

Yes. We benefit from copper hedging we've got in place. Copper is trading below the $3 or $4. So we have some offset there. We also have the capitalization of costs associated with the TSF. In Q1, we had zero or basically zero costs capitalized. When looking purely at production costs, it doesn't represent the right picture. We haven't had any increases in costs on a normalized basis. The range of $10 to $12 million to $14 million will be a credit to costs as we go through to Q2 through Q4. So those are the bigger factors. We've also shifted around some non-essential capital, but at this stage, we feel we will be within the guidance provided.

Okay. And then regarding capital expenditures; I'm looking at the cost guidance that you provided, which is about $4 million out of the $65 million to $70 million that you're forecasting for the year. Could you clarify what that is and how that may evolve over the course of the year? Would we expect Q2, Q3 to be the bulk of it, or is it back-end weighted as well?

Yes. We had minimal expenditure in Q1. We expect that to be incurred; I believe a major shutdown is planned for August of this year. So you'll see that being incurred then and then minimal costs probably in Q2 and Q4.

So what is that exactly?

It will be towards the shutdown. We've also got some routine maintenance planned during the shutdown. There are also some replacement parts, as you'd expect on all the fleet, and just up to the timeline of refit. So nothing major is occurring as part of the normal course.

Thank you...

Sorry, another point to highlight, we are putting in place that long-term water solution. Obviously, we've got all the permits now, and we are just in the process of building that also along the backend of the year.

Okay. I have another question. Last year, in October, you put out the feasibility study for Mount Milligan, I guess extending the reserves but then also not moving forward on an expansion there. Could you update me on where you think that stands now, given the current pricing environment and copper and gold price environment?

Well, the first step for us is going to be to update the market with the new resource statement. As I said earlier, we've got 50,000 meters worth of drilling to incorporate. Once that has occurred, the team will relook at the mine plans and sequencing. I don't see any major capital expenditure at these current prices, but it's just going to be tweaking the mine plan. Ideally, we'd convert some of these potential resource updates into reserves. So nothing material is coming at this stage.

Okay. Thank you. That's all my questions.

Thank you very much. We have no further questions on the line. Please continue with the presentation or any closing remarks.

We'll conclude the conversation there, and thank you, everybody, for joining in. We look forward to meeting you in person in the coming weeks and months. We'll see you soon. Thank you.

Thank you very much, and thank you, everyone. That does conclude the conference call for today. We thank you for your participation and ask that you disconnect your lines. Have a good day, everyone.