Earnings Call Transcript - CGAU Q3 2023

Operator, Operator

Thank you for standing by. This is the conference operator. Welcome to the Centerra Gold Third Quarter 2023 Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. I would now like to turn the conference over to Lisa Wilkinson, Vice President, Investor Relations and Corporate Communications with Centerra Gold. Please go ahead.

Lisa Wilkinson, Vice President, Investor Relations and Corporate Communications

Thank you, operator, and good morning, everyone. Welcome to Centerra Gold's third 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 third quarter 2023 results. This should be read in conjunction with our MD&A and financial statements, both of which can be found on our website. All figures are in US dollars unless otherwise noted. Presentation slides are available to accompany this webcast. Following the prepared remarks, we will open the call for questions. 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 Chief Executive Officer

Thank you, Lisa, and good morning, everyone. Centerra had a very strong third quarter with significant free cash flow generation, driving a substantial increase to our cash balance and outperforming our expectations, producing almost 87,000 ounces in the quarter. Our 2023 consolidated gold production guidance remains on track between 340,000 and 360,000 ounces, and we expect to continue to generate significant free cash flow in the fourth quarter, further increasing our cash balance by the end of the year. Paul Chawrun will speak to our operations in more detail a little later and he'll speak to the adjustments to the site level production guidance of both Oksut and Mount Milligan. In September, we rolled out our value maximizing strategic plan for our portfolio of assets. As part of this plan, we announced positive economics for the Thompson Creek Mine restart, while simultaneously initiating a process to evaluate all strategic options for the Molybdenum Business Unit. At Mount Milligan, we continue to drive operational and technical improvements to unlock the full potential of this cornerstone asset. In 2024, we expect higher levels of gold production and similar levels of copper production compared to 2023 guidance. We continue to believe that we will be able to fund capital returns to our shareholders, invest in internal growth projects and exploration, and evaluate external opportunities for growth, all while maintaining a significant cash balance through the end of 2024 and beyond. Finally, I'd like to touch on some ESG achievements in the quarter. In line with our commitment to sustainable and responsible mining practices, Centerra published its 2022 annual ESG report in the third quarter, which includes the responsible gold mining principles conformance report, along with an independent assurance letter. As we continue to progress our climate and nature strategy, our next objective is to identify feasible emission reduction pathways and initiatives. We continue to reinforce our ESG performance through the release of our sustainable development policy, which focuses on ensuring a safe and respectful workplace for our employees and contractors, protecting the natural environment, and creating a positive impact in the communities where we operate. I'll now pass the call over to Paul to walk through our operational performance in the quarter.

Paul Chawrun, Chief Operating Officer

Thank you, Paul. On slide five, we show operating highlights at Mount Milligan for the quarter. The Mount Milligan mine produced over 39,000 ounces of gold in the third quarter in line with last quarter and produced 15 million pounds of copper, almost 10% higher than the last quarter. There was some residual or waste transition zone material mined in the third quarter and recoveries were impacted by the elevated ratio of pyrite to chalcopyrite. We expect medium-term recoveries for gold and copper to be similar to those achieved in 2023 and have been undertaking additional metallurgical reviews with a goal of increasing recoveries from current levels to better manage this part of the ore body. Our Mount Milligan production guidance for 2023 has been adjusted due to lower-than-planned gold recovery from the elevated pyrite to chalcopyrite ratios and lower production experienced in the first half of the year due to mine sequencing. We are now expecting gold production at Mount Milligan to be between 150,000 and 160,000 ounces down slightly from the low end of the 160,000 to 170,000 ounces announced previously. Our copper production guidance remains at 60 million to 70 million pounds and is expected to be near the low end of this range. In the third quarter, gold production costs were $1,050 per ounce, and all-in sustaining costs on a by-product basis were $1,150 per ounce, 16% and 28% lower than last quarter, respectively. All-in sustaining costs were lower quarter-over-quarter due to higher gold ounces sold, lower gold production cost per ounce, and higher by-product credits as a result of high copper sales. As a result of the revised gold production outlook for Mount Milligan, we have increased its full year 2023 gold production costs and all-in sustaining cost guidance. Gold production costs for the full year are now expected to be between $1,050 and $1,100 per ounce, and all-in sustaining cost guidance is now expected to be $1,175 to $1,225 per ounce. A comprehensive asset optimization review has been launched, which includes safety, productivity, and cost efficiencies in concert with mine plan optimization. This review is expected to be completed in 2024 and drive incremental improvements in operations. Finally, we congratulate our Mount Milligan team and partners at Chu Cho Environmental for receiving the BC Mine Reclamation Award for Outstanding Reclamation Achievement in 2023. This award recognizes the ongoing research into innovative techniques to help achieve eventual reclamation and land use objectives at the Mount Milligan Mine in collaboration with local communities. On slide six are the operating highlights at Oksut. Third quarter production was over 86,000 ounces, which exceeded our expectations during the ramp-up of operations. As of late September, all of the stored gold and carbon inventory had been processed. The mine continues to have elevated levels of recoverable ounces of gold in ore stockpiles and on the heap leach pad, which are expected to be processed in the coming months. Due to the operating team's successful ramp-up execution in the third quarter, full year 2023 production guidance at Oksut has been increased to 190,000 to 200,000 ounces of gold. Gold production costs and all-in sustaining costs on a by-product basis in the third quarter of 2023 were $445 per ounce and $582 per ounce, respectively, due to accruals from inventory buildup. As a result of the increased gold production outlook at Oksut, we are lowering our gold production cost and all-in sustaining cost guidance for 2023. We now expect full year gold production costs to be in the range of $425 to $475 per ounce, and all-in sustaining costs in the range of $625 to $675 per ounce. To wrap up, I'd like to commend the Oksut team for achieving 2 million work hours without a lost time injury in September. The safety of our employees and contractors is our top priority, and this milestone demonstrates our commitment to a zero-harm culture. I'll now pass it to Darren to walk through our financial highlights for the quarter.

Darren Millman, Chief Financial Officer

Thanks, Paul. Slide seven details our third quarter financial results. Centerra had a strong financial performance in the third quarter with net earnings of $61 million or $0.28 per share. There were several adjusting items in the quarter, including $23 million of reclamation provision reevaluation recovery, $2 million unrealized foreign exchange gains relating to the reclamation provisions at the Endako Mine and the Kemess Project, and $9 million of deferred income tax expense resulting from the effect of foreign exchange rate changes on monetary assets and liabilities in the determination of taxable income related to Oksut and Mount Milligan. As a result of these one-time items, adjusted net earnings in the third quarter were $44 million or $0.20 per share. In the third quarter, sales were 130,973 ounces of gold and 15.4 million pounds of copper. Gold and copper sales were higher than production in a quarter, mainly due to timing of shipments. The average realized price was $1,741 per ounce of gold and $2.99 per pound of copper, which incorporates the existing stream arrangements for the Mount Milligan Mine. At the Molybdenum Business Unit in the third quarter, approximately 2.7 million pounds of molybdenum was sold at an average realized price of $24.08 per pound, generating revenue of $68 million. In the third quarter of 2023, additions to property, plant, and equipment and total capital expenditure were $25 million and $24.6 million, respectively. At Mount Milligan, we expect elevated capital expenditure in the fourth quarter. Consolidated all-in sustaining costs on a by-product basis for the quarter were $827 per ounce. At Oksut, we processed all of the stored gold and carbon inventory, which had minimal cash processing costs to convert to dore bars. As mentioned earlier in the call, we have adjusted our 2023 production guidance at mine site level to reflect year-to-date performance and our expectations for the fourth quarter, but with no overall financial impact. As a result, our consolidated all-in sustaining costs for the full year are unchanged and expected to be in the range of $1,000 to $1,050 per ounce. Moving to the next slide, slide eight shows our financial highlights for the quarter. In the third quarter, we generated significant free cash flow driven by strong performance at Oksut. Cash provided by operating activities was $167 million in the quarter, and free cash flow was $144 million. At the Molybdenum Business Unit, approximately $16 million of the investment in working capital for the first quarter was released during the third quarter. The Molybdenum Business Unit generated $9 million free cash flow in the third quarter. At the Mount Milligan Mine, cash provided by mine operations and free cash flow were $36 million and $25 million, respectively in the third quarter. At Oksut in the third quarter, the mine generated $144 million in cash from operations and $134 million in free cash flow. In the fourth quarter, in addition to the continued free cash flow generation from our operations, a payment of $25 million is due from Orion Mine Finance Group in relation to the December 2021 sale of our interest in the Greenstone project. We expect to receive additional future payments once certain production milestones have been achieved. Centerra ended the third quarter by growing the cash balance by $90 million to $492 million. In September, we extended our $400 million revolving credit facility with a renewed four-year term maturing on September 8th, 2027, which is currently undrawn. This provides us with total liquidity of $890 million. Given our strong financial position, the Board declared a quarterly dividend of $0.07 per share. I'll pass it back to Paul for closing remarks.

Paul Tomory, President and Chief Executive Officer

Thanks very much, Darren. The third quarter demonstrated our ability to generate significant free cash flow from our operations. And as I said earlier, we expect to continue to generate robust free cash flow in the fourth quarter and further increase our cash balances. We're optimistic about the future of Centerra and our ability to internally fund our strategic initiatives with our cash flow from operations. And with that, I'll open the call to questions.

Operator, Operator

Thank you. We will now begin the question-and-answer session. Our first question comes from Anita Soni of CIBC World Markets. Please go ahead.

Anita Soni, Analyst

Hi, good morning. Thank you for taking my call. My first question is regarding the guidance for the Molybdenum Business Unit that you've provided. I see that for the Langeloth facility, the incremental working capital investment is between $15 million and $45 million, and you've spent about $15 million year-to-date. Am I right in understanding that this will result in approximately $30 million being spent in the fourth quarter? Also, what does it indicate that you've kept the upper limit of the range at $45 million?

Darren Millman, Chief Financial Officer

Yeah, it's Darren here. The Molybdenum project can change significantly, as we saw in Q1. We're not expecting any specific cash outlay in Q4 and are even hopeful for the return of some working capital since the molybdenum price has decreased a bit compared to Q3. Therefore, I don't anticipate a significant outlay. The range we provided in our guidance is quite large.

Anita Soni, Analyst

Okay. So that's just conservatism in terms of where the prices could go if they gone?

Darren Millman, Chief Financial Officer

Correct. That's right.

Anita Soni, Analyst

All right. And then the second question, if you could provide some color on Mount Milligan for 2024. I noticed in the release, or I think it was in the release for the MD&A, but you basically said that recoveries are going to be the same as 2023, which is lower on copper as I can see than your prior forecast, what you would originally have put out at the beginning of the year, but probably in line with what we saw on the tour. And then gold production is higher next year. And copper is lower next year. So does that mean that the grades are higher in gold and copper grades are lower? And then also what does that mean to the strip ratio with the sequencing of the phases that you have there?

Paul Chawrun, Chief Operating Officer

Thank you, Anita. This is Paul. To start with the recoveries, we can anticipate them to be similar to what we experienced in 2023, potentially a bit better, but we're being cautious in that estimate. The main challenge we face is the amount of gold we can process, much of which is linked to pyrite, whereas our circuit is designed to recover chalcopyrite. This is part of the reason for our downgrade in gold production for 2023, as we need to postpone some of the higher-grade gold. Looking ahead to 2024, we expect copper production to be about the same as our current projections, while gold production is expected to increase compared to what we projected for 2023.

Anita Soni, Analyst

And so that's related to the grades. I guess my question was …

Paul Chawrun, Chief Operating Officer

The grade and the recovery, when you have higher copper grade, you actually get better gold recovery. We can expect the copper grades to be around the same, but we are looking at feeding higher grade gold, and then the recovery would be about what we say, and we are looking at incremental improvements as well in 2023.

Anita Soni, Analyst

Okay. And then the final on that was, what kind of strip ratios relative to what you delivered this year?

Paul Chawrun, Chief Operating Officer

Approximately the same as what we're seeing this year. Basically, we have a fleet, and we optimize material movement of the fleet. We'll be somewhere in the range of 50 million tons for this year. We can expect about the same, and we take advantage of the sequencing, we take advantage of the waste material movement to be able to build the dike, our annual tailings lift. So approximately the same. And we don't minimize the strip ratio. We utilize the fleet.

Anita Soni, Analyst

All right. Okay. That's it for my questions. Thank you.

Operator, Operator

Our next question comes from Mike Parkin of National Bank. Please go ahead.

Mike Parkin, Analyst

Hi, everyone. Congratulations on a great quarter. I have a question directed towards Darren or possibly Paul. Regarding slide six on Oksut, the ASIC guidance of $625 to $675, would that also account for a significant non-cash inventory expense?

Darren Millman, Chief Financial Officer

For Q3, all the previous inventory costs and cash expenses were largely released. As we move into Q4, we anticipate some increased processing costs, but these remain minimal in relation to the substantial inventory buildup. While there will be higher cash costs associated with converting the inventory compared to gold and carbon, they are still relatively low. We expect a decrease in the overall all-in sustaining cost at Oksut for the final quarter based on our year-to-date performance.

Mike Parkin, Analyst

Do you have an idea of like in millions of dollars, what the working capital adjustment for Oksut would be roughly for fourth quarter?

Darren Millman, Chief Financial Officer

Yeah. If you refer to the financials, it's pretty much all that large increase from inventory level is coming from that movement in Oksut inventory.

Mike Parkin, Analyst

Okay. Thanks very much, guys.

Operator, Operator

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

Brian MacArthur, Analyst

Hi. Good morning. I'd like to follow up on the last question. Is there any update on Oksut? It had a strong quarter, but it seems you recently extracted 80,000 ounces at less than $50 cash costs and are now beginning to process the 200,000 ounces. That’s low cost. As you start operations and work through the process, have you noticed anything that might make you more optimistic or pessimistic about cash generation from Oksut in 2024?

Darren Millman, Chief Financial Officer

Well, I'll make a general comment and I'll ask Paul to jump in on some of the more technical details. We remain very bullish on the cash generation potential in Q4 and Q1, Q2 as we draw down those inventories. Thus far, as we noted in our release, it is outperforming our expectations and we don't have any major reasons to believe that there will be any hiccups. So Paul, you can perhaps elaborate on that.

Paul Chawrun, Chief Operating Officer

I believe we've increased the guidance, which you can consider in your model. We've also released the life of mine plan for 2024, so you can use those figures for your projections. Overall, it has been a strong start, and we are very satisfied with the operations so far.

Brian MacArthur, Analyst

Great. Thanks. If I remember correctly, the ADR has a capacity of about 30,000 ounces a month. So you have just liberated all that. I just want to ensure that everything else is ramping up smoothly as well.

Paul Chawrun, Chief Operating Officer

October was a very good month. We're on track.

Brian MacArthur, Analyst

Perfect. Thank you very much.

Paul Chawrun, Chief Operating Officer

The lead solution grades remain high and they're going to be coming down as per the plan.

Brian MacArthur, Analyst

Right. Right. Okay. Great. Thank you very much.

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.