Earnings Call Transcript - CGAU Q2 2025

Operator, Operator

Thank you for your patience. This is the conference operator. Welcome to the Centerra Gold Second Quarter 2025 Conference Call. I will now hand the call over to Lisa Wilkinson, Vice President of Investor Relations and Corporate Communications at Centerra Gold. Please proceed.

Lisa Wilkinson, Vice President of Investor Relations and Corporate Communications

Thank you, operator, and good morning, everyone. Welcome to Centerra Gold's Second Quarter 2025 Results Conference Call. Joining me on the call today are Paul Tomory, President and Chief Executive Officer; David Hendriks, Chief Operating Officer; and Ryan Snyder, Chief Financial Officer. Other members of the management team are available for the Q&A session. Our news published yesterday outlines our second quarter 2025 results and is complemented by our MD&A and financial statements, which are available on SEDAR, EDGAR and our website. All figures are in U.S. dollars unless otherwise noted. Presentation slides accompanying this webcast are available on Centerra's website. Following the prepared remarks, we will open the call for questions. Before we begin, I would like to remind everyone that today's discussion may include forward-looking statements, which are subject to risks that could cause our actual results to differ from those expressed or implied. For more information, please refer to the cautionary statements in our presentation and the risk factors outlined in our annual information form. We will also be referring to certain non-GAAP measures during today's discussion. For a detailed description of these measures, please see our news release and MD&A issued last evening. I will now turn the call over to Paul Tomory.

Paul Tomory, President and Chief Executive Officer

Thank you, Lisa, and good morning, everyone. In the second quarter, both Mount Milligan and Oksut contributed to strong earnings, driven by high commodity prices. Gold and copper production in the quarter was over 63,000 ounces and 12.4 million pounds of copper, respectively. The second quarter marked the first full period under the leadership of our new Chief Operating Officer, David Hendriks, and our newly appointed General Manager at Mount Milligan, Eric Dell. Their early impact has been substantial, bringing renewed operational focus and significantly enhancing our confidence in the mine's future performance through the initiation of an infill and grade control drilling program among other initiatives. We are making solid progress on two studies that are expected to support Centerra's long-life copper-gold organic growth strategy in British Columbia, both of which are targeted for delivery in the second half of 2025. At Mount Milligan, work on the PFS is on track to be completed in the third quarter. We are evaluating the substantial mineral resources to unlock additional value beyond the current mine life of 2036, which is based on the available space in the existing tailings storage facility. We are progressing with the engineering solution for additional tailings capacity, and the PFS is set to incorporate an increase of annual mill throughput in the range of 10% through the ball mill motor upgrades, which will be at modest capital cost. At the Kemess Project, we continue to advance work on a PEA based on an open pit and conventional underground mining concept, which is on track for completion by the end of 2025. Kemess has significant infrastructure already in place, requiring only targeted refurbishment to support operations. To complement this existing infrastructure, it is anticipated that new crushing, conveying and mining infrastructure will be developed to further support our operations and long-term efficiency. We expect the existing infrastructure to lower the execution risk of the project when compared to a typical greenfield project of this scale. Yesterday, we announced that we are advancing on the Goldfield Project, which is located in the historic mining district of Nevada, one of the most reliable mining jurisdictions in the world. This is a strategic milestone that is expected to grow Centerra's near-term gold production profile and can be fully funded from our existing liquidity. Over the last several months, we've undertaken additional technical work and project optimizations that have significantly enhanced Goldfield's value proposition. Favorable gold prices, combined with these recent developments, have improved the project's economics, enabling us to move forward with execution. Our technical study confirms attractive economics of the project, including an after-tax NPV of $245 million and an after-tax IRR of 30% using a long-term gold price of $2,500 per ounce. We have implemented a targeted hedging strategy of 50% of gold production in 2029 and 2030 with a gold price floor of $3,200 per ounce and an average gold price cap of $4,435 in 2029 and $4,705 in 2030 at no cost to Centerra. This gold hedging strategy positions us to lock in strong margins to safeguard project economics and enable predictable cash flow during the ramp-up period while maintaining exposure to rising gold prices for the life of the mine. Just under 80% of the planned production over the life of mine remains unhedged and fully exposed to market gold prices. The project is expected to have a 7-year mine life, average annual production of around 100,000 ounces in peak production years at an all-in sustaining cost of $1,392 per ounce and a competitive initial capital cost of $252 million. The project is well positioned to benefit from a short timeline to first production by the end of 2028 and low execution risk, given its relatively simple process flow sheet. Goldfield is projected to grow our near-term gold production profile, generate robust cash flow and deliver significant value to shareholders. We believe also that Goldfield is ideally positioned in our project development pipeline, bringing additional gold production online, helping to offset the natural declines at Oksut and to ensure continuity as we advance development of the longer-life Mount Milligan and Kemess assets in British Columbia. I'd like to share an update on our sustainability initiatives. In June, we published our 2024 sustainability report. We achieved several important milestones this past year, and we remain committed to meet the rising expectations through greater transparency and alignment with recognized sustainability frameworks and standards. With respect to some of the progress we've made at Oksut, we achieved full compliance with the International Cyanide Management Code, reinforcing our commitment to safe and environmentally responsible mining practices. We advanced our climate change strategy, focusing on economically feasible decarbonization initiatives at the site level, refining our climate risk scenario analysis and continuing to enhance our disclosures. As part of that broader effort, Oksut earned an ISO 5001 certification for energy management, helping us improve the energy efficiency at site. We also strengthened our partnerships with indigenous-owned businesses and reached 19% indigenous employee representation across our British Columbia operations. In terms of local economic impact, our local procurement spending rose by 26% year-over-year across all operating jurisdictions, reaching $134 million. And lastly, we are pleased to share that we have surpassed our 2026 gender diversity goal for the second year in a row, with women representing 38% of our Board and 33% of our executive officers. Together, these achievements reinforce our belief that strong sustainability performance is a key driver of long-term value for all of our stakeholders. And with that, I'll pass the call over to David to walk through our operational performance for the quarter.

David Hendriks, Chief Operating Officer

Thanks, Paul. Slide 8 shows operating highlights at Mount Milligan for the second quarter. Mount Milligan produced over 35,000 ounces of gold and 12.4 million pounds of copper in the quarter. In the first half of the year, mining operations encountered zones with more challenging mineralization, resulting in lower-than-anticipated gold grades from these areas of the pit. While gold grades remain above the average grade of the reserve, we believe the variability is primarily attributed to certain zones being drilled with wider spacing. We have commenced an infill and grade control drilling program in the second quarter. This initiative is designed to improve geological confidence and will be integrated into the upcoming Mount Milligan PFS, contributing to a mine plan with greater visibility on grades moving forward. Also, as we continue to improve our understanding of the ore body at Mount Milligan and advance our broader site optimization program, we are enhancing our mine-to-mill integration to achieve better control of grades delivered to the mill. We have updated our 2025 gold production guidance at Mount Milligan to between 145,000 and 165,000 ounces to recalibrate for the adjustment in grades. We have reaffirmed our 2025 copper production guidance of 50 million to 60 million pounds. Both gold and copper production and sales are expected to be weighted towards the second half of the year. In the second quarter, all-in sustaining costs on a byproduct basis were $1,286 per ounce, 10% higher than last quarter due to an increase in sustaining CapEx and lower ounces sold in the quarter. We have revised our 2025 cost guidance ranges at Mount Milligan to reflect updated production guidance figures. All-in sustaining costs on a byproduct basis are now expected to be between $1,350 and $1,450 per ounce. On Slide 9, we show operating highlights at Oksut for the quarter. Second quarter production was over 28,250 ounces, better than planned due to higher grades resulting from mine sequencing. We have reaffirmed our 2025 production guidance at Oksut with production expected to be higher in the second half of the year as we access higher grade areas of the mine. In the second quarter, all-in sustaining costs on a byproduct basis were $1,755 per ounce, which is higher compared to last quarter, driven by a higher royalty expense per ounce due to elevated gold prices. We have revised our full-year cost guidance ranges at Oksut to reflect both higher royalty costs stemming from the strong gold price environment and an updated royalty structure that was approved by the Turkish government this July. 2025 all-in sustaining costs on a byproduct basis are now expected to be $1,675 to $1,775 per ounce. The restart of Thompson Creek is advancing, with approximately 20% of the total capital investment complete. In the second quarter, we invested $27 million in nonsustaining capital expenditures, bringing total investment spend since the September restart decision to $82 million. We have reaffirmed our 2025 guidance for nonsustaining CapEx at Thompson Creek. The project remains in line with the total initial capital estimate of $397 million, as outlined in the feasibility study, and is on track for first production in the second half of 2027.

Ryan Snyder, Chief Financial Officer

Thanks, David. Slide 11 details our second quarter financial results. Adjusted net earnings in the second quarter were $53 million or $0.26 per share, which benefited from strong metal prices. Key adjustments to net earnings include $15 million of unrealized gain on the remeasurement of the sale of the Greenstone partnership in 2021 and $12 million of unrealized loss on the financial asset related to the additional agreement with Royal Gold, among other things. In the second quarter, sales were over 61,000 ounces of gold and 12 million pounds of copper. The average realized price was $2,793 per ounce of gold and $3.62 per pound of copper, which incorporates the existing streaming arrangements at Mount Milligan. At the molybdenum business unit, approximately 3.1 million pounds of molybdenum were sold in the second quarter at the Langeloth facility at an average realized price of $21.43 per pound. Consolidated all-in sustaining costs on a by-product basis in the second quarter were $1,652 per ounce. We have updated our 2025 all-in sustaining cost guidance, following lower expected production at Mount Milligan and higher royalty costs at Oksut, driven by elevated gold prices and the newly updated royalty structure. We now expect consolidated all-in sustaining costs on a byproduct basis to be between $1,650 and $1,750 per ounce in 2025. Slide 12 shows our financial highlights for the quarter. In the second quarter, we increased cash flow from operations before working capital and income taxes paid by 22% over last quarter, generating a total of $98 million. After routine statutory tax and royalty payments to the Turkish government, cash flow from operations on a consolidated basis for the quarter was $25 million, and we had a free cash flow deficit of $25 million for the quarter. In the second quarter, Mount Milligan generated $57 million in cash from operations and $43 million in free cash flow. Oksut's cash flow in the quarter was impacted by the tax and royalty payments of $84 million made to the Turkish government. As a result, Oksut's cash used by operations was $18 million in the second quarter and free cash flow deficit was $28 million. We expect to generate strong free cash flow at Oksut in the second half of 2025. The molybdenum business unit used $1 million of cash in operations and had a free cash flow deficit of $27 million this quarter, mainly related to spending on the Thompson Creek restart. Returning capital to shareholders remains a key pillar in our disciplined approach to capital allocation. In the second quarter, we increased our share buybacks by 80% compared to the previous quarter, repurchasing 3.9 million shares for total consideration of $27 million. Our Board has approved the repurchase of up to $75 million of Centerra shares through the NCIB in 2025, and we have repurchased $42 million in the first half of the year. We also declared a quarterly dividend of $0.07 per share. In the first 6 months of 2025, we have returned $63 million to shareholders through dividends and buybacks. As part of our commitment to returning capital to our shareholders, we expect to remain active on the share buybacks subject to market conditions. At the end of the second quarter, our cash balance was $522 million. This results in total liquidity of over $920 million, while positioning us to fully fund our organic growth projects at Goldfield, Mount Milligan, Kemess, and Thompson Creek while continuing to return capital to shareholders.

Paul Tomory, President and Chief Executive Officer

Thanks, Ryan. We're very proud of the progress we've made in advancing our internal growth strategy. The decision to move forward with the Goldfield project is a key milestone that is expected to enhance our near-term gold production profile and to create value for our shareholders. In parallel, we're actively advancing studies at both Mount Milligan and Kemess, which are on track to be completed in the second half of the year. The two studies represent significant milestones in advancing our gold growth development pipeline and are focused on unlocking additional value from our assets in British Columbia. Our internal growth strategy is underpinned by a strong balance sheet and disciplined capital allocation. All of our projects, Goldfield, Mount Milligan, Kemess, and Thompson Creek, are expected to be self-funded from our existing liquidity, reflecting our commitment to generating value while maintaining financial strength and flexibility. And with that, operator, I'll open the call to questions.

Operator, Operator

And today's first question is from Don DeMarco with National Bank.

Don DeMarco, Analyst

Congratulations on continuing to progress on your internal growth strategy. First question has to do with Mount Milligan. I see that you encountered some challenging mineralization. Are you seeing good results and improved confidence after implementing the additional infill drilling?

David Hendriks, Chief Operating Officer

Don, this is David. What we've done is we've really increased the density of drilling in the area that we've been mining for the last 6 months, and we will continue to mine over the next 18 months. We're very confident that our new guidance number and the drilling results that we have will lead to a much better prediction of what we're doing. And also, that same information is being implemented into the study that's being done to look at the extension of the Mount Milligan mine life.

Don DeMarco, Analyst

Okay. Great. And then on to Goldfield, so I see the project go forward, and it certainly makes sense to offset Oksut. But at first glance, the reserves of 700,000 ounces are unchanged from the end of last year when the company decided not to proceed. And I think at that time, it was partly because of the size of the reserves. So could you walk through what's new now versus last year? And is it primarily a higher gold price?

Paul Tomory, President and Chief Executive Officer

It's a combination of several factors. You're correct that our current reserve is roughly equal to the resource we reported at the end of the year. However, we've conducted significant technical work since then, focusing mainly on optimizing crushing processes and improving recovery rates for a portion of the ore. This has given us a clearer expectation of achieving higher recoveries. We’re currently seeing recovery rates in the 70s, compared to the 60s previously. Additionally, the increase in gold prices, which is now $600 to $700 an ounce higher than six months ago, plays a crucial role. With the collar we established for part of our ounces, the economics have greatly improved. One way to view this is that the rise in gold prices has compensated for inventory, making this project very appealing from a net present value standpoint. The NPV at a gold price of $2,400 is in the mid-200s, and it increases significantly at $3,000, $3,200, and $3,400. Overall, this is mainly driven by the rising gold prices, along with effective technical improvements in the relationship between crushing and recovery rates compared to run-of-mine.

Don DeMarco, Analyst

Okay. Great. That's helpful. And so I guess in this environment, they say if you've got it, then build it. And looking at your pipeline here, like how do you think about sequencing and financing Goldfield, Mount Milligan, PFS and Kemess? We're looking forward to the PEA coming out. And if I sum up the CapEx on these projects with some assumptions on Kemess, it seems to maybe approach available liquidity.

Paul Tomory, President and Chief Executive Officer

So absolutely, one of our key strengths here is that with available liquidity, we can fund all of that, so Thompson Creek, Goldfield, Kemess, Mount Milligan; and still have some gas left in the tank. And that's at $2,500. So at spot, certainly, we remain in very significant go-forward free cash flow generation mode. But no question about it, we can afford all these projects at $2,500, given existing liquidity.

Operator, Operator

And our next question comes from Lawson Winder with Bank of America Securities.

Lawson Winder, Analyst

When thinking about Mount Milligan and your sort of advancing understanding of the grade, when we look to 2026, how could the production profile differ versus the prior available technical report? And can you give us an early indication of directionally what we might be thinking in terms of production there versus 2025?

Paul Tomory, President and Chief Executive Officer

Well, Dave can provide more detail here. Essentially, what we've been working on for the past 18 months is exploring a zone that was not drilled as thoroughly as most of the rest of the ore body. This has led to some grade challenges. Dave mentioned that we are implementing a grade control and infill program, which has significantly enhanced our understanding and confidence in the grades we will be mining. This will be included in the Preliminary Feasibility Study. I don’t want to get ahead of ourselves regarding the specifics in the PFS, but we expect to have that ready in about a month. As previously indicated, we will be extending the mine life by increasing tailings capacity. Looking at Mount Milligan over the past four to five years, the average production profile for both gold and copper should be similar for the entire mine life. There will be fluctuations as we encounter higher grade pockets, especially for gold. Overall, the production we’ve seen in the last five years is a fair representation of what we can expect moving forward. However, I must emphasize that there are higher-grade gold zones in the ore body, leading to some years of elevated production. We will provide a comprehensive production plan for the entire mine life at Mount Milligan in September.

Lawson Winder, Analyst

Yes. I look forward to that. And if you don't mind, like I wouldn't mind just trying to push you a little bit more on what we could expect in the technical study. I understand your reluctance to reveal too much. But I mean, at its core, it's about extending the mine life, but you've mentioned a 10% increase in throughput. In the past, we've talked about potential increases in gold recoveries. Is that something that could be a feature in terms of the near-term mine plan that might complement the long-term extension? And is there anything else that you guys are thinking about in this study in terms of near-term benefits to complement that longer-term life extension?

Paul Tomory, President and Chief Executive Officer

So what I can tell you is the principal objectives of the study are, number one, identify tailings capacity. That is why our mine life is currently limited to 2036. And we have done that. We've got an engineered solution for incremental tailings capacity. Second, you pointed out throughput increase. We're targeting 10% through relatively what I would call straightforward improvements in the existing circuit. On recovery, we are also looking at whether or not there are modifications we can make in the plant to aid in recovery, and we're positive that there may be something there, certainly over a life of mine basis. And what you're fishing for here is production in '26, '27. I think what we've guided here for this year, as I said, give or take, within a range is representative of what you might expect for the next several years.

Lawson Winder, Analyst

Okay, that's great. I appreciate the details, every bit helps. If I could ask one final question about Goldfield, considering the timeline for first production in 2028, what do you see as the bottleneck? Can you walk us through the key permits that need to be secured to ensure production begins in 2028?

Paul Tomory, President and Chief Executive Officer

Yes. So starting with the last part of the question there, most of the permits are in place for Goldfield. As you saw on our plan view, there are a number of deposits there. The bulk of the ounces come from the Gemfield deposit. That is essentially permitted, but we have to make one minor amendment on having upsized that pit versus what was previously permitted. So what I would say is there are some incremental permits to obtain on an expanded Gemfield as well as the other satellite pits. I would call these fairly routine Nevada-type permits. The critical path for the project really goes through the completion of engineering, procurement and then execution. The bulk of the execution will take place in '27 and '28, and we intend to mobilize the mining contractor. So the critical path runs through what I would call project activities, engineering, procurement and then execution.

Operator, Operator

And the next question is from Raj Ray with BMO Capital Markets.

Raj Ray, Analyst

I have three questions, if I may. First, on Mount Milligan. Dave, can you point to how long you expect to be in this current zone that you're mining through that's giving lower-grade reconciliation versus your reserve model? And is it going to go substantially into '26 or not? Secondly, with respect to the Oksut royalty, am I correct in assuming that this is more broad, that the sliding scale is the same, which is basically for every $100 increase in gold price, the royalty increases by 125 basis points? And then I do have a question on Goldfield after that.

David Hendriks, Chief Operating Officer

I will discuss the Mount Milligan project. It's important to note that we are currently mining above the average grade of the deposit. There was an area we had anticipated to be a higher-grade section that did not turn out as expected. The ongoing drilling, which will be part of the Pre-Feasibility Study, gives us confidence that we have a solid understanding of what to expect in the coming years. I prefer not to provide specifics too early, so I'll wait for the Pre-Feasibility Study to release the final numbers and details. However, as Paul mentioned, our revised guidance should be quite accurate for the next couple of years.

Ryan Snyder, Chief Financial Officer

And then on Oksut, Raj, yes, they've updated the royalty table, just given where gold prices have gone versus what was there before. The old royalty table stopped at $2,100. So at $2,100 gold price, that was the max royalty, which was 18.75% in Turkey. And I think you know we get a 40% reduction in that because we process our material in country. What they've done is expand that table all the way up to $5,100 just to take into account where gold may go. Because of these larger numbers, it's now moving up every $300 adds 125 basis points prior to our reduction. And so yes, we're in a different world now. At the gold price we're in today, it's about a 22.5% royalty and we get the 40% reduction. So the scale has increased in terms of how far up it can go, but it doesn't move with every $100 increment in gold anymore.

Raj Ray, Analyst

Okay. That's great, Ryan. And Paul, this is a question more for you. I'm trying to understand the strategic rationale behind going ahead with Goldfield. I mean I understand the 30% after-tax IRR, the NPV, the high gold price, the improvement in recovery. But like if I look at it, if I look at your capital allocation, how does this stack up against dividends and share buybacks over the next 2 to 3 years? Because the way I look at it, the free cash flow that you're going to generate over the next 3 years is pretty much going to be going back into building Goldfield for a project that not of great scale, at least at this point, and then there's a number of other projects you're looking at the same time. So is there a risk you might be stretched from a bench strength point of view? So can you comment on that?

Paul Tomory, President and Chief Executive Officer

I think there are questions regarding both talent and finances. From a bench strength perspective, we have been enhancing our internal capabilities to manage and develop projects. Our projects team has seen significant growth, with many members bringing valuable experience from Nevada heap leach projects. Thus, we are confident in our ability to execute on Goldfield. However, the larger concern relates to returns and liquidity. As you mentioned, Goldfield has a high internal rate of return, especially at consensus gold prices, and the returns become even more attractive at higher gold prices. It’s important to note that our project development pipeline, which includes Kemess, Milligan, Thompson Creek, and Goldfield, can be funded using our current liquidity while we maintain our buyback program. This is a crucial point I want to emphasize. We believe our shares offer strong value for our cash, and we will continue with buybacks. Additionally, we see it as suitable to increase our gold exposure by investing in Goldfield as part of our capital allocation strategy. We believe the returns from the buyback are robust and intend to strategically boost our gold exposure.

Operator, Operator

And the next question comes from Luke Bertozzi with CIBC World Markets.

Luke Bertozzi, Analyst

Most of my questions have been answered at this point. Overall, I think it's a great decision you guys are going out of Goldfield to bridge the production gap after Oksut. Just curious, how does this change your thinking around M&A?

Paul Tomory, President and Chief Executive Officer

We believe we have a compelling production profile going forward. We are still finalizing some details, such as the Milligan mine life extension and the future of Kemess. By the end of the year, we expect to have a clearer picture. We see a strong potential in our assets, which we believe can provide returns for multiple decades. Therefore, we primarily plan to focus on our organic projects and do not see a need for substantial mergers and acquisitions. Given our current share prices, we have no plans for share-based acquisitions. If we do consider any M&A activity, it would be modest, cash-based, and strategic, complementing what we have internally, such as the investments we've made or assets close to Kemess. We will look for opportunities that are geographically and strategically aligned with our capital projects. Importantly, any M&A we entertain will not compromise our ability to fund projects organically, and we do not intend to seek cash from the market. Any potential acquisitions would be modest in size and aligned with our production goals. We will avoid large share-based mergers and acquisitions.

Operator, Operator

And the next question is a follow-up from Lawson Winder with Bank of America Securities.

Lawson Winder, Analyst

I wanted to ask again about Mount Milligan. As you consider the expanded resource with the new resource evaluation for the PFS coming up in September, will there be parts of the resource that are excluded from the Royal Gold stream? If so, is there a way to move beyond that area of influence in future studies?

Paul Tomory, President and Chief Executive Officer

No, Royal Gold has an area that is not subject to them, but it's located so far away that we are unlikely to be mining there. However, I want to remind you that we have an amended streaming agreement with Royal Gold, which has improved the terms in two steps. Our overall vision for Mount Milligan is to extend production by about a decade, given our current 11-year reserve, which runs until 2036, while actively pursuing exploration to the Southwest and West. We are consistently seeing promising results and continuity of mineralization both at depth and near the surface. Therefore, our goal is to continue adding inventory beyond what is covered in the PFS for a potential third decade. While there is still work to be done, the mineralization shows strong continuity, and we are very optimistic about our findings beyond the scope of the PFS. To answer your question simply, everything I’ve mentioned will be subject to the Royal Gold stream.

Operator, Operator

And at this time, this concludes the question-and-answer session and today's conference call. You may now disconnect your lines. Thank you for attending and participating in today's call, and have a pleasant day.