Earnings Call Transcript - CGAU Q2 2023

Operator, Operator

Thank you for your patience. This is the conference operator. Welcome to the Centerra Gold Second Quarter 2023 Conference Call. All participants are currently in listen-only mode and the session is being recorded. After the presentation, there will be time for questions. I will now hand the conference over to Lisa Wilkinson, Vice President, Investor Relations and Corporate Communications at Centerra Gold. Please proceed.

Lisa Wilkinson, Vice President, Investor Relations and Corporate Communications

Thank you, operator, and good morning everyone. Welcome to Centerra Gold's Second Quarter 2023 Results Conference Call. Joining me on the call today are Paul Tomory, President and Chief Executive Officer; Paul Chawrun, Chief Operating Officer; and Darren Millman, Chief Financial Officer. Our release yesterday details our second quarter 2023 results. This should be read in conjunction with our MD&A and financial statements, both of which can be found on SEDAR, EDGAR and our website. Presentation slides are available on Centerra Gold's website to accompany this webcast. Following the prepared remarks we will open the call for questions. All figures are in US dollars unless otherwise noted. Before we begin, I would like to caution everyone that certain statements made today may be forward-looking and are subject to risks, which may cause our actual results to differ from those expressed or implied. Please refer to the cautionary statements included in the presentation, as well as the risk factors set out in our annual information form. Also, certain of the measures we will discuss are non-GAAP measures. Please refer to the description of non-GAAP measures in our news release and MD&A issued yesterday. I will now turn the call over to Paul Tomory.

Paul Tomory, President and CEO

Thank you, Lisa, and good morning everyone. After three months at Centerra, I've now had the opportunity to visit our operations and projects and engage with employees, the investment community and other stakeholders. I'm optimistic for the opportunities that lie ahead. In the second quarter, we've already achieved several milestones that are setting Centerra for strong performance in the second half of the year. Most notably at the end of May, we received approval of an EIA for the Oksut mine from the Turkish Ministry of the Environment. We continue to enjoy strong local community support for the project and with all the necessary regulatory approvals in hand, we restarted full operations on June 5 and produced over 20,000 ounces of gold in a month. Looking ahead, we expect Oksut to produce between 180,000 and 190,000 ounces of gold in 2023, which will make it a significant contributor to our expected stronger second half performance. Turning to Mount Milligan, we remain on track with our plan to have stronger production in the second half of the year. Our full year production guidance for both gold and copper are unchanged and including Oksut, our full year consolidated gold production guidance is between 340,000 and 360,000 ounces. Paul Chawrun will speak to our operations in more detail later in the call. One of my top priorities has been to evaluate all of Centerra's assets with an ultimate goal of developing a comprehensive value maximizing strategic plan. Key aspects of this will include, a view on the Molybdenum Business Unit with an assessment of the potential for a restart of operations at the Thompson Creek Mine, continuing to drive operational and technical improvements of Mount Milligan, repositioning our approach at the Goldfield project to target higher returns; and lastly, assessing opportunities for growth in gold production. In conjunction with our asset level strategy, we're also developing a capital allocation framework focused on optimizing shareholder value. By taking a systematic and diligent approach, our goal is to direct our capital in three ways; return to shareholders, invest in internal projects and for external M&A opportunities. Stay tuned as we expect to roll out this new strategic vision for the company in the coming months, which will serve as a crucial step in our journey to maximizing value to our shareholders and other stakeholders. Shifting to Nevada, I'd like to provide an update on the Goldfield project. Paul Chawrun and I had the opportunity to visit the project in June and we think it presents a great opportunity in a top mining jurisdiction. Based on my experience building projects and operating mines in Nevada and with what we see at Goldfield, we will be pivoting our approach. Most importantly, we'll focus for now only on the oxide and transition material, principally in the Gemfield and nearby deposits. This will allow us to reevaluate project scope of work to achieve a lower CapEx flow sheet and to maximize returns. Second, we believe the project has upside potential from its large underexplored land position. As a result of this change in focus, we will take more time to further explore the property before releasing an initial resource estimate. Our full year exploration guidance at Goldfield has been increased to between $16 million and $20 million, up from $10 million previously. This strategic pivot is aligned with our disciplined approach to capital allocation, and will allow us more time to target a higher return project. We continue to have a positive outlook, but we want to achieve a higher return profile before we proceed with development. Turning now to the molybdenum business unit, as mentioned earlier, we're developing a strategic plan which is expected to incorporate a number of aspects for value maximization. First, we continue to progress our PFS study on the restart of the Thompson Creek mine and we remain on track to release highlights, later in the third quarter. And second, we're assessing the strong operating synergies that will exist between the Thompson Creek mine and the Langeloth metallurgical plant. Moving now to Slide 5. Centerra's committed to sustainable and responsible mining practices and this is demonstrated through our ESG commitment and accomplishments. Today, I'd like to highlight that we have achieved full conformance for the World Gold Council's responsible gold mining principles, during our year three assessment. This accomplishment reflects our commitment to responsible mining practices, proactive risk management and continuous improvement in our relationships, with stakeholders and local communities. We understand that ESG is an ongoing journey, and we'll continue to work diligently towards our goals and initiatives in the coming year. I look forward to updating the market, on our commitments and achievements going forward. And with that, I'll pass the call over to Paul Chawrun, to walk through our operational performance in the quarter.

Paul Chawrun, Chief Operating Officer

Thank you, Paul. On Slide 7, we show the operating highlights at Mount Milligan for the quarter. The Mount Milligan mine produced over 40,000 ounces of gold in the second quarter, a 24% increase from last quarter and produced 13.8 million pounds of copper. As we mentioned in the previous releases, we always expected the production of Mount Milligan in 2023 to be weighted towards the second half of the year. However, production in the quarter was impacted by lower-than-planned recoveries due to mine sequencing, which resulted in more oxide ore than planned in an ore-waste transition zone in Phase 9. We are now deeper in Phase 9 and have mostly mined through the ore-waste transition zone. Copper grades are expected to improve in the second half of the year, as the mine progresses deeper, which is expected to improve metal recoveries compared to the first half of the year. Mill throughput in the second quarter was 5.6 million tonnes, with the site achieving record tonnes processed in both May and June. Gold and copper sales at Mount Milligan were lower than production in the second quarter, mainly due to timing of bulk shipments. In July, concentrate shipments from Mount Milligan were not materially impacted by the union strike at the Port of Vancouver. We expect to have four concentrate shipments in the third quarter, and are targeting another four shipments in the fourth quarter. The timing of shipments and associated sales between quarters may be affected by logistical delays, from union strikes at the port. Our Mount Milligan production guidance is unchanged for gold and copper and is back half weighted for the year. We expect 2023 gold production to be near the low end of guidance of 160,000 to 170,000 ounces, while copper production is tracking towards the midpoint of guidance of between 60 million to 70 million pounds. Gold production costs were $1,255 per ounce in the second quarter, and all-in sustaining costs on a byproduct basis were $1,599 per ounce. All-in sustaining costs were impacted by higher mining costs, including general inflation on labor and consumable costs, lower gold ounces sold, partially offset by lower sustaining capex. We have increased our Mount Milligan full year 2023 all-in sustaining cost guidance to $1,125 to $1,175 per ounce, as we are seeing lower amounts capitalized to the TSF, higher maintenance costs, higher rehandling costs and consumables. This year, the wildfires have been quite severe across Canada and continue to be active in British Columbia. We have been fortunate at Mount Milligan, and have not been impacted by the wildfires so far this year. And finally, we congratulate our Mount Milligan mine rescue team for placing first in the exportation event at the BC provincial mine rescue competition. On Slide 8, is an operations update for Öksüt. Following the receipt of the updated EIA at the end of May crushing, stacking and ADR activities resumed in early June. Second quarter production was just over 20,000 ounces. At the end of June, there was approximately 80,000 recoverable ounces in the stored golden carbon inventory and approximately 200,000 recoverable ounces of gold in the ore stockpiles and on the heap leach pad. Full year 2023 production guidance at Öksüt is 180,000 to 190,000 ounces of gold as production levels are expected to continue to ramp up in the second half of the year, with gold production approximately split 45% and 55% in the third and fourth quarters respectively. Gold production costs were $404 per ounce in the second quarter and all-in sustaining costs on a byproduct basis were $1,143 per ounce. The all-in sustaining costs in the second quarter reflects only a partial month of production, lower sales ounces, standby costs and a full quarter of sustaining capital expenditures. As we ramp up production and achieve a more uniform spend on sustaining capital expenditures, we expect costs at Öksüt to decrease in the second half of the year. As a result, our full year 2023 all-in sustaining cost guidance at Öksüt is $650 to $700 per ounce. To wrap up, I’d like to commend the Öksüt team for achieving one million work hours without a lost time injury. This is a true testament to the safety leadership and culture at our operations in Turkey. And now, I’ll pass on to Darren to walk through our financial highlights for the quarter.

Darren Millman, Chief Financial Officer

Thanks, Paul. Slide 10 details our second quarter financial results. Net loss from continuing operations was $40 million or a loss of $0.18 per share. There were two adjusting items in the second quarter. First, $8 million of reclamation provision revaluation recovery at sites on care and maintenance, primarily attributable to a decrease in the risk-free interest rate applied to discounts the estimated future reclamation cash flows; and second, $6 million of deferred income tax resulting from the effects of foreign exchange rates on monetary assets and liabilities in the determination of taxable income related to the Öksüt and Mount Milligan mines. As a result of these two items, adjusting net loss from continuing operations was $42 million or a loss of $0.20 per share. Centerra recorded $185 million in net revenue during this quarter with contributions from our two operating mines Mount Milligan and Öksüt as well as our Molybdenum Business Unit. In the second quarter, sales were 48,155 ounces of gold and 12.8 million pounds of copper. Gold sales were lower than production in the quarter by 22%, mainly due to Turkish national holidays that delayed gold sales at the end of June. The average realized price was $1,532 per ounce of gold and $2.56 per pound of copper which incorporates the existing streaming arrangements at the Mount Milligan mine. At the Molybdenum Business Unit in the second quarter approximately three million pounds of moly was sold, generating revenue of $76 million with an average market price of $21.23 per pound. Consolidated all-in sustaining costs on a byproduct basis for the quarter were $1,711 per ounce consolidated all-in sustaining guidance for the full year is expected to be in the range of $1,000 to $1,050 per ounce. As noted by Paul Chawrun earlier, our gold inventory levels remain elevated at Öksüt with processing of gold in carbon currently underway. I would like to highlight that while our full year all-in sustaining cost guidance at Öksüt is between $650 to $700 per ounce, the remaining cash processing costs, associated with the gold and carbon, is expected to be less than $50 per ounce and the remaining cash processing costs associated with the 200,000 ounces of gold in ore stockpiles and on the heap leach pad are expected to be less than $225 and $100 per ounce respectively. Capital expenditure in the second quarter were $23 million, up from $5 million in the first quarter, mainly driven by timing of the spend. We are lowering our Mount Milligan capital guidance to be $50 million to $60 million due to lower capital cost at the TSF and deferring some of our projects to next year. Consolidated capital guidance for the full year is expected to be between $90 million and $115 million, which includes $35 million to $45 million at Öksüt. On July 15 the Turkish government increased the corporate income tax rate from 20% to 25%. This is a retroactive earnings starting at January 1, 2023 and subsequent tax periods. We estimate this change will result in incremental $0.9 million in cash taxes to be paid with respect to the income earned in the first half of 2023 at Öksüt. Slide 11 lists our financial results for the quarter. Cash provided by operating activities was $33 million in the second quarter and free cash flow was $11 million. At the Molybdenum Business Unit approximately $35 million of the investment in working capital from the first quarter was released during the second quarter. These expected additional releases from working capital will occur during the remaining six months of 2023, providing molybdenum prices and inventory levels remain at their current levels. The Molybdenum Business Unit generated $31 million in cash in the second quarter. At Mount Milligan, cash provided by mine operations and free cash flow were $22 million and $9 million respectively in the second quarter. At Öksüt with the partial month of operation in the second quarter the mine generated $8 million in cash from operations and $0.4 million in free cash flow. In the second quarter to manage gold price risk associated with the expected high sales at Öksüt in the short-term we entered into gold hedges. We purchased gold put option contracts for 75,000 ounces at an average strike price of $1,942 per ounce.

Paul Tomory, President and CEO

Under Centerra's normal course issuer bid in the second quarter the company purchased and canceled 1.27 million common shares, for a total consideration of 7.3 million. We continue to make purchases via an automatic share purchase plan in July. Centerra ended the second quarter with a cash balance of $402 million and $398 million available under a corporate credit facility. This provides us with total liquidity of $800 million. Given our strong financial position the Board declared a quarterly dividend of $0.07 per share. I'll now pass it back to Paul for closing remarks. Thank you, Darren. After achieving several milestones in the second quarter, we're well positioned for strong performance in the second half of the year. In the meantime, we continue to work diligently on delivering safe and sustainable production and developing Centerra's strategic vision which will clearly articulate our path to value realization for each asset in the portfolio. We look forward to updating the market in the coming months. And with that, operator, I'll stop and open the call for questions.

Operator, Operator

Thank you. We will now begin the question-and-answer session. Our first question comes from Fahad Tariq of Credit Suisse. Please go ahead.

Fahad Tariq, Analyst

Hi. Good morning. Thanks for taking my question. In the press release you mentioned, in the paragraph talking about evaluating all the assets that you're assessing opportunities for growth in gold production. Can you talk a little bit about, how you're thinking about organic versus inorganic growth? And if it's organic growth specifically what type of opportunities may exist at Öksüt, Mount Milligan, Goldfield? Thanks.

Paul Tomory, President and CEO

Yeah. Thanks, Fahad. Our overall strategy right now is focused on looking at our current assets. What is the value that we think is in those assets? And as you've seen we're repositioning the way we look at Goldfield as an example. At Milligan, we continue to drive the technical and operating improvements. And most importantly, we think that there's value in the molybdenum business which will be highlighting over the course of the coming months. But in terms of your specific question on growth in gold production, we will from time to time as opportunities become available, assess potential bolt-on type acquisitions things that make sense given our skill set and where we think we can add value. And that's something we do as a normal part of business assessing external opportunities. Given that, it's an M&A point I won't speculate much further on it, but it's just a general statement that we are open to M&A where it makes sense.

Fahad Tariq, Analyst

Okay. That makes sense. Now, regarding Mount Milligan and the cost aspect, it appears that the primary reason for the cost increase this quarter was the sequencing in the transition materials. Can you elaborate on the inflationary pressures? Are they in line with your expectations? And am I correct in understanding that it is the grades this quarter that have contributed to the increased costs?

Paul Tomory, President and CEO

Yes. I'll make a general comment on inflation and then hand it over to Paul on the specifics. Mount Milligan saw significant inflation through 2021 and the first call it three, four – sorry, two, three quarters of 2022 that inflation has abated and it is now more what I would call normal inflation, but it experienced significant inflation in 2021 and 2022. And to comment specifically on this year this quarter Paul will talk about that.

Paul Chawrun, Chief Operating Officer

Yes. We are observing increases in costs that are mostly in line with what other operators in the industry are experiencing. There is some pressure from a competitive labor market in D.C. However, the key factor for the increase in our all-in sustaining cost guidance is the denominator. We're projecting toward the lower end of our gold production guidance, which is what is driving up the all-in sustaining costs. The main reason for this is related to recovery. We encountered slightly more oxide than we had anticipated, which was replaced with stockpiled material. Consequently, this had an impact on our gold recovery, which is the primary reason for the increase.

Fahad Tariq, Analyst

Okay. Great. Thank you.

Operator, Operator

Our next question comes from Dalton Baretto of Canaccord. Please go ahead.

Dalton Baretto, Analyst

Yes. Thank you. I want to start by wishing you Paul all the best in this new role. I also want to continue in this kind of vein of strategy, but I want to ask you at a higher level than some of the tactical things you've alluded to in your prepared comments. From where I said I mean arguably your portfolio has too many non-producing assets. It's too base metals heavy. You've got this onerous stream at Mount Milligan. Your cash balance is down 58% since the end of 2021. So I guess three questions for me. Number one, do you still want to be a gold company? And if so how much at a base metal value are you willing to tolerate in the portfolio? And secondly, how are you thinking about restructuring the portfolio at a pretty high level? And then third, what are some of the more immediate strategic milestones we can look forward to? Thank you.

Paul Tomory, President and CEO

Yes, there’s a lot to discuss and you’ve pinpointed some of the aspects we’re addressing at Centerra. Regarding your first question about gold, yes, we are Centerra Gold Inc. and we plan to continue being primarily focused on gold production. We appreciate the prospects of base metals, particularly the strong copper production and reserves at Mount Milligan, and we are even open to molybdenum opportunities. However, our main focus will remain as a gold mining company. In my first three months, I’ve visited all our sites, and there's truly no substitute for seeing, meeting, and understanding each asset's characteristics in our portfolio. Right now, Centerra is assessing each asset more tactically. A clear example is Goldfield, where there was a previous plan for early development, but we now see a chance for a project with a higher return by taking additional time for exploration and considering a different potential processing approach. For Kemess, we recognize the resources available, and we understand we have a strategically valuable location in British Columbia that could open up further opportunities. Molybdenum is the most significant area where we see considerable untapped potential. We need to proceed cautiously since we are Centerra Gold, but we believe there is value to be unlocked in molybdenum and we will be progressing plans to restart Thompson Creek, providing more details in the third quarter. I’ve tried to address all your questions generally, but if you would like to delve deeper into any specific ones, please let me know.

Dalton Baretto, Analyst

No, I think that's helpful. And then just immediately speaking outside from the potential restart of Thompson Creek are you planning to update us with an overall strategic plan, or is it going to continue to be more tactical at each of the assets until you can execute on some of these higher-level things?

Paul Tomory, President and CEO

Yes. I think that in the third quarter, we will probably provide a broader overview of our strategy, including our desired future position, value assessment, and strengths. We will discuss our approach to capital allocation, with a focus on tactical plans at key assets, primarily molybdenum and Goldfield, and to a lesser extent, the others. Overall, it will be a comprehensive look at our aspirations for the next two, three, or four years.

Dalton Baretto, Analyst

That’s helpful. Thank you, Paul.

Paul Tomory, President and CEO

Thank you.

Operator, Operator

Our next question comes from Ovais Habib of Scotiabank. Please go ahead.

Ovais Habib, Analyst

Hi Paul and team. Just a couple of questions have already been answered. So, just two questions from me. Starting off with the Goldfields. In regards to the resource estimate or update, I'm guessing, you're seeing a lot more potential to add additional mineralization and that's why you've kind of increased exploration budget, can you kind of just walk us through where you see upside? And you talked a little bit about the flow sheet as well. So maybe a little bit of color there as well.

Paul Tomory, President and CEO

Yes. Thanks, Ovais. Just a quick highlight on what Goldfield is. It's principally two deposits. There are other smaller ones, but it's principally got two deposits. One, which is a sulfide potential sulfide resource and the other one is a potential oxide resource. At this stage, we don't think that the sulfide resource is a sufficient scale to pursue. And that has the beneficial corollary of greatly simplifying the flow sheet. So rather than requiring a much finer grind to achieve the recoveries, we're going to look at whether we can tackle the oxide material, through a run of mine or a simplified crushing circuit. That would greatly simplify the flow sheet, reduce the capital and target higher returns. To your question, are we seeing exploration potential? The answer is, yes. As you can see, we've ramped up our spending or our planned spending in exploration and we are focused on oxide targets. So we are delaying what had previously been communicated as the timing for a resource estimate. But that's principally associated with our shift in strategy to focus on oxide and transitional material that will be associated with a much leaner capital profile. So, what we're going to be doing in the near term is, more focused metallurgical test work on oxides only and transition material and specifically targeting oxide material to add to the potential resource.

Ovais Habib, Analyst

Thank you for the information. Now, regarding the molybdenum business, Dalton mentioned it briefly. With a study expected to be completed in Q3, are you leaning towards selling the moly business, or how should we view the restart of the Thompson Creek Mine?

Paul Tomory, President and CEO

That's a great question and it will guide our discussion in the upcoming quarters, but let me provide a broad perspective. Currently, the fundamentals for molybdenum are quite strong. The market conditions are favorable on both the supply and demand fronts. One of the key factors driving strong demand for molybdenum is the energy transition, as it plays a crucial role in stainless steel production. Its applications are significant in areas such as offshore wind projects and the upgrading of Europe's gas infrastructure, as well as in hydrogen applications due to its excellent properties in alloying steel for corrosion resistance. We believe these robust fundamentals will support our efforts in this area. Our initial phase of work on molybdenum aims to demonstrate value to our shareholders and other stakeholders, highlighting the substantial potential of this business. In this first phase, we will focus on showcasing that value. There will be some initial spending as we progress with this project over the next months and quarters, but it will be relatively modest compared to what would come with a larger commitment to the asset. Are we considering mergers and acquisitions in this area? Yes, we are. We must always evaluate options that create the most value for our shareholders, but the first step is to establish value and develop a clear and strategic execution plan for the molybdenum business.

Ovais Habib, Analyst

Okay. Thanks. Thanks for the color, Paul. And that’s it for me. Thanks for taking my questions.

Paul Tomory, President and CEO

Thank you.

Operator, Operator

Our next question comes from Michael Siperco of RBC Capital Markets. Please go ahead.

Michael Siperco, Analyst

Yeah. Thanks very much. Flipping back to Öksüt if we could for a second. I know you've provided some measures of cash costs already incurred to produce the ounces in inventory and the remaining cash operating cost. But is there a reconciliation that you can provide to the forward ASIC guidance that reflects the actual cash outflow associated with the goal you expect to produce over the balance of the year?

Darren Millman, Chief Financial Officer

Yes, it's Darren Michael. We can provide that information. We anticipate the cash cost for processing gold and carbon will be under $50 per ounce. For the gold on the heap and in stockpiles, we expect costs to range from $100 to $250. Historically, we have guided that the costs for what is on the heap and in stockpiles are approximately $100 per ounce at each site. That's the general range. If you need more detailed information, we can discuss that separately.

Michael Siperco, Analyst

Well, yeah. I mean I guess I'm asking at a high level, even if you don't want to provide the number, it's fair to say that if your ASIC guidance for Öksüt over the rest or over 2023 is $650 to $700, only a subset of that will actually be incurred in costs, whether that's $500 $550 whatever the number is. That's the right way to look at it correct?

Darren Millman, Chief Financial Officer

That's right. And we historically also referenced that the 100,000 ounces that was on our inventory was recorded all-in sustaining at approximately between $450 to $500. So that was what was already incurred but put on our balance sheet.

Michael Siperco, Analyst

Right. Okay. Okay. Thank you. And then maybe on the sequencing into 2024 as you work through the inventory, can you give some high-level guidance on how long we should be expecting elevated levels of production beyond the inventory ounces you currently have out of the pit, as you presumably continue to mine and stack new ounces is there some idea of when the volume starts to slow down as you catch up with that backlog?

Paul Chawrun, Chief Operating Officer

Yeah. We expect to have elevated levels well into the first half. And then as we move towards midpoint of next year, it will start to transition into normal state.

Michael Siperco, Analyst

You're expecting normal state in the second half, or is that a transition down to more...

Paul Chawrun, Chief Operating Officer

That will be a transition down starting approximately midyear.

Michael Siperco, Analyst

Great. So then I guess safe to assume you'd reach normal state by 2025. Is that the way to think about it?

Paul Chawrun, Chief Operating Officer

Yeah, I would say that's a reasonable estimate.

Michael Siperco, Analyst

Can you discuss your perspective on the buyback as a use of cash? Additionally, how aggressive do you plan to be with it for the remainder of the year, and what is your thought process regarding this strategy?

Paul Tomory, President and CEO

Well, we certainly believe that buying our shares is good value and has been over the last couple of months. And shareholder returns whether through dividends or buybacks remains a cornerstone of our capital allocation framework. Darren, you can provide some more detail on what we've been doing.

Darren Millman, Chief Financial Officer

Approximately just under $8 million has been returned or repurchased to date. Our Board continues to support the program. Just yesterday, we had a Board meeting where we discussed our active plans for July. I don’t foresee any reduction in activity in the short term.

Michael Siperco, Analyst

Can you discuss if there is a specific trigger you're considering to determine when you'll be active? Is it related to your NAV compared to the share price or something similar?

Paul Tomory, President and CEO

We're not going to put a number out there but we see good value in our shares.

Michael Siperco, Analyst

Okay. Copy. Thanks very much.

Paul Tomory, President and CEO

Thank you.

Operator, Operator

This concludes the question-and-answer session, as well as today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.