Kinross Gold Corp Q1 FY2020 Earnings Call

Good morning. My name is Laura, and I will be your conference operator today. I would like to welcome everyone to the Kinross Gold Corporation First Quarter 2020 Results Conference Call and Webcast. All participants are in a listen-only mode to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. Thank you. At this time, I'd like to turn the call over to Mr. Tom Elliott, Senior Vice President, Investor Relations, and Corporate Development. Mr. Elliott, you may begin your conference.

Thank you, and good morning. With us today, we have Paul Rollinson, President and CEO, and the Kinross senior leadership team, Andrea Freeborough, Paul Tomory, and Geoff Gold. Before we begin, I'd like to bring your attention to the fact that we will be making forward-looking statements during this presentation. For a complete discussion of the risks, uncertainties, and assumptions, which may lead to actual results and performance being different from estimates contained in our forward-looking information, please refer to Page 2 of this presentation, our news releases dated May 5, 2020, the MD&A for the period ended March 31, 2020, and our most recently filed AIF, all of which are available on our website. I'll now turn the call over to Paul.

Thanks, Tom, and thank you all for joining us today. This morning, we'll provide an update on how we're managing in the current environment at our quarterly results. First, however, I want to convey that our thoughts are with all those who have been affected by the pandemic as well. On behalf of our company, I'd like to express our deepest gratitude and respect for all of the frontline workers who continue to put themselves at personal risk during this crisis. Regarding Kinross, we, like many companies, are facing various pandemic-related challenges across our business. However, through a combination of early planning, disciplined adherence to health and safety protocols, and support from host governments, all of our mines remained in operation during the quarter and have not been materially impacted. During the quarter, we did not experience significant business interruptions, and most importantly, our employees were healthy and safe. However, we are taking nothing for granted and have established business continuity and contingency plans to help us manage a wide range of financial and operational scenarios. Throughout this crisis, we have been working closely with our host governments and communities to aid their campaigns to control the spread of COVID. We've committed $5.3 million in support of local efforts to provide medical supplies, equipment, and food aid at our sites around the world. Despite this challenging environment, we have performed well, and we are proud of our first-quarter results. Our three largest mines, Paracatu, Kupol-Dvoinoye, and Tasiast delivered strong production and cost during the quarter. Of note, Tasiast delivered its second consecutive quarter of record production. As is the case with any global portfolio, there were some challenges during the quarter, but the impact on the company as a whole was relatively small. On April 1, as part of our COVID update, we also provided a look at some preliminary Q1 results including sales, production, costs, and our balance sheet position. Importantly, our cash flow and balance sheet are well ahead of our initial budget, which assumed $1,200 gold. Strong cash flow coupled with a precautionary drawdown of our credit facility resulted in a cash balance of just over $1.1 billion with total available liquidity of $1.9 billion at the end of the quarter. During the quarter, we generated approximately $110 million of free cash flow, and our run rate in April was noticeably stronger than Q1. To elaborate, if gold prices for the remainder of 2020 averaged $1,700 per ounce, we would expect to generate free cash flow in excess of $700 million for the year. The current environment for gold, energy, and foreign exchange is good for our business. Notably, the price of gold is at record levels in both the Brazilian real and the Russian ruble. If these currency levels persist, they can have a powerful impact on our cost structure and margins. For example, at Paracatu approximately 60% of our costs are in Brazilian real, which has depreciated by more than 25% year-to-date. Although we withdrew our 2020 guidance in recognition of the uncertain operating environment, we will continue to work towards the original targets. I'll now turn the call over to Andrea for a more detailed review of our financial results.

Thanks, Paul. I'll begin with a few financial highlights from the quarter, review capital expenditures, and end with a summary of the balance sheet. During Q1, we produced approximately 567,000 attributable gold equivalent ounces at an average cost of sales of $754 per ounce and all-in sustaining cost of $993 per ounce. Our average realized gold price was $1,581 per ounce in Q1, up 21% from last year. We achieved a margin of $827 per ounce, up 33% compared with the same period last year. During the quarter, we sold approximately 15,000 ounces of gold, fewer than we produced largely due to the impact of the pandemic on timing of metal shipments to the refinery. However, this was higher than our previous sales estimate noted on April 1 due to the favorable timing of sales principally from Bald Mountain. Our adjusted EPS was $0.10, and adjusted operating cash flow per share of $0.33 were both up compared with the first quarter last year. Adjusted operating cash flow was $419 million versus $231 million last year, and as Paul mentioned earlier, free cash flow during the quarter was approximately $110 million, which is in line with the fourth quarter. Specific items that affected our quarter-end cash balance included our $100 million revolver repayment in February, the subsequent $750 million draw towards the end of March, and the interest payment of approximately $50 million. The first payment on our Chulbatkan acquisition was approximately $130 million, and a tax payment of approximately $44 million in Brazil, considerably higher than last year, reflecting Paracatu's outstanding performance and profitability in 2019. Turning to income tax, during the quarter, we recorded an expense of $45 million compared with roughly $28 million in the first quarter of last year. You'll also notice our current income tax receivable on the balance sheet has increased by approximately $100 million compared with the end of 2019. This has two components, both of which relate to the U.S. CARES Act that was passed at the end of March in response to COVID. First, we were initially expecting a U.S. AMT refund of $33 million this year, which has now increased by an additional $33 million of AMT tax credits, previously expected to be received after 2020. And second, new tax loss carryback opportunities have created additional expected tax refunds of approximately $60 million, which also benefit our adjusted operating cash flow. Capital expenditures during the quarter were approximately $191 million. In terms of CapEx going forward, we're not intentionally slowing expenditures. However, as global travel and flight restrictions remain in place, there may be a reduction in intended spending if we're unable to execute on portions of our plan. Looking forward on operating costs, there will be some challenges including more favorable foreign exchange rates on the Brazilian real and Russian ruble and lower energy prices. On the other hand, higher gold prices will result in higher royalties and, of course, any future operating challenges associated with COVID may also have an impact. As Tom mentioned, we continue to prepare for a wide range of scenarios related to the pandemic. At this point, it is too early to accurately predict how these factors will affect the remainder of the year. Having said that, as currency exchange rates and energy prices have become more attractive, we look to incrementally add to our hedges. With relatively strong sales, rising gold prices, and a $750 million draw on our credit line, we ended the quarter with approximately $1.1 billion of cash and cash equivalents. Including a revolver draw, our total debt stands at $2.5 billion, and net debt is approximately $1.3 billion. On a trailing 12 months basis, our net debt-to-EBITDA ratio is 0.9 times. During the quarter, Moody's upgraded our credit rating to investment grade, which means Moody's, S&P, and Fitch now all rate Kinross debt as investment grade. It's also worth noting our cash balance further increased in early April as we received our initial $200 million draw from the Tasiast project financing. In summary, we're confident in Kinross’ liquidity position today and believe we have a strong base to continue to fund our operations and projects through this uncertain environment. Now I'd like to turn the call over to Paul Tomory.

Thanks, Andrea. First, I will spend a few minutes discussing some of the key COVID-related initiatives and contingencies we've put in place. Then I'll move on to a summary of how operations are performing. We acted quickly with the establishment of our pandemic task force and took several immediate measures across the operation. There's minimal impact on our Q1 results, but there are likely to be minor challenges over the next few months. In the area of supply chain, our six teams continue to review all key consumables and critical supply channels in order to assess potential disruptions and identify mitigating actions, including finding alternative sources of supply. Where possible, we've been working to increase stock of key consumables to three months. The one obvious standout in the portfolio is Russia, where supplies come in once a year on a seasonal ice road. For this reason, Kupol-Dvoinoye has roughly 12 months of inventory, including fuel and other critical items. While we effectively mitigated any material business interruption during the quarter, we could see some negative complications if current pandemic-related restrictions extend into the summer months. Now moving to a summary of operating the projects. As Paul indicated, our three biggest producers continued strong performance and accounted for 62% of first-quarter production. Paracatu is our largest producer and continues to see good results, reflective of the asset optimization program, which was completed last year. Recoveries were lower compared with previous quarters due to anticipated variations in ore characteristics, which accounted for the decrease in production compared with Q4. Recoveries are expected to improve as we move into higher-grade ore in the fourth quarter of this year and into 2021. Throughput was also lower in the quarter due to unplanned downtime to replace an apron feeder in one of the crushers in January. Importantly, cash costs of Paracatu were lower than Q4 as a result of our continued cost reduction strategy and improved productivity supported by favorable currency. As a reminder, we filed a new technical report of Paracatu in March that outlined an increase in life of mine production by approximately 24% compared with the prior technical report from 2014, with average annual production of around 540,000 ounces from 2020 to 2031. Turning to Russia, Kupol-Dvoinoye continued to generate good cash flow. Despite some early suspected cases of COVID, which ultimately tested negative, our Russian operations delivered strong production during the quarter, albeit down slightly from the prior period due to the mining of anticipated lower grades. We expect to return to grades more typical of what we saw in 2019 for the remainder of the year. At Chulbatkan, we remain very excited about the prospects of this developing asset as we completed 23,500 meters of infill step-out and metallurgical drilling as of the end of the quarter. Metallurgical samples from Phase 1 drilling are at the lab, and results are pending. Assuming no impact from COVID, we expect to have 50,000 meters of new resource drilling ready for the resource model update at year-end. The drill program for the remainder of this year will focus on step-out and infill drilling for both high-grade and growth confirmation purposes. This near-surface heap-leachable deposit has an initial resource estimate of approximately 4 million ounces and is characterized by highly continuous mineralization that is open along strike and at depth. Our 2020 exploration program also includes $10 million for more distal step-out drilling in a highly prospective and under-explored 120 square kilometer license area. We remain excited about the future of Chulbatkan and look forward to sharing more detailed results with you later in the year. Moving to Tasiast, not only was 2019 a record year, but we also had another record quarter in Q1. Our lowest cost producer for the quarter set a new production record of over 103,000 ounces. Throughput also achieved a second consecutive record quarter, averaging over 16,000 tons per day during Q1, despite the restrictions on moving people in the second half of March due to COVID-related government mandates. We expect to transition to the processing of stockpile material in late Q2, which will result in lower grades being delivered to the mill during the second half of the year. The 24K project continues to progress well. While the project currently remains on schedule to increase throughput to 21,000 tons per day by the end of 2021 and then to 24,000 tons per day by mid-2023, timing could be challenged by constraints on the global movement of people and supplies caused by prolonged COVID-related travel restrictions. Finally, on Tasiast, as you will have seen in our press release yesterday, a notice was filed by labor delegates, and strike action was initiated by a majority of the workers at the mine. As a result, we have temporarily suspended non-essential activities at the site while we work to resolve this dispute. The issue at hand is the quantum of the premium being paid to employees who are working longer than normal rotation due to government-mandated COVID-related travel restrictions. In addition, they have attempted to reopen terms of the three-year collective labor agreement negotiated in the fall of last year. The company remains open to discussions with the union representatives as a result of this situation. There have been four short strikes at Tasiast since the operation began, with the average length of these labor actions being approximately nine days, none of which have had a material impact on the company. We are disappointed that delegates have opportunistically undertaken a strike action during the COVID pandemic; however, we are optimistic this will be resolved. We understand also that the labor inspector passed on requests from the labor minister that the delegates suspend strike action given the backdrop of COVID. Moving to our U.S. operations, Round Mountain delivered a strong quarter for production and costs. Although production was slightly lower than the previous quarter due to lower grades. At Bald Mountain, production decreased as a result of fewer tonnes stacked than planned in the previous quarter, combined with low ore recoveries due to pH control issues. We have these under control now, and our stacking rates have rebounded. Additionally, we worked through some temporary logistical challenges associated with transporting employees to and from the site while adhering to our strict social distancing protocols. However, logistical challenges may become less of an issue moving forward as the U.S. appears positioned to begin lifting some restrictions. At Fort Knox, we experienced higher than planned costs due to increased rates of waste mined and impacts from COVID. We have largely worked through the geotechnical water management and heap kinetics issues in the past several quarters and expect more reliable performance going forward. The Gilmore expansion project remains on track as all critical materials and equipment have been purchased and are on-site, and almost all key contractors have been mobilized. Moving to Ghana, Chirano has been a strong cash contributor to the company. With recent additions to the reserves, we anticipate it will continue to do so. However, as we extend the mine life, we are getting into extensions of main ore bodies characterized by narrower veins, more variations in slightly lower grades, and requiring multiple headings. As a result, Chirano's cash costs will likely increase compared to what we have been seeing for the past few years; however, the asset will still produce cash flow at our mine planning gold price of $1,200 an ounce. For the quarter, Chirano was impacted by lower grades and greater-than-anticipated mining dilution, which resulted in higher cash costs compared to the same period last year. Finally, regarding our Chilean projects, at La Coipa, the workforce ramp-up to begin stripping is being challenged by limitations placed on people moving within Chile as part of the country's COVID response. As a result, first production is expected to be delayed by approximately three months to the middle of 2022. At Lobo-Marte, our PFS is nearing completion, and we expect to be able to release the results early this summer. To ramp up our operational explorations of projects, our priorities continue to be the health and safety of our employees; strong, consistent operating results; and delivering our projects on time and on budget. And with that, I'll turn the call back over to Paul. To conclude, while the world continues to work through this pandemic as a company, we have come together with our employees in our local communities to work together to mitigate the impacts of COVID. I'm proud to say that our employees remain safe and all of our sites remained operational during the quarter. This would not have been possible without the good relationships we have with our suppliers, communities, and host governments. I'd like to thank our employees, who despite their own challenges, have stepped up and enabled Kinross to manage through this situation. Even with the impacts of COVID, we feel we delivered a good quarter. Our projects continue to advance, and we remain in a very strong financial position. With that operator, can we now open up the call for questions? Thank you.

We do have a question from Jackie Przybylowski from BMO Capital Markets.

Hi, good morning. I was just wondering if you could give us a little bit more color on the situation at Tasiast. I mean, I know it's difficult for you. It is impacting the project that you are working on there, the expansion. Do you have any idea how long this might last or is there going to have to be any kind of other intervention, government intervention, or whatever in order to get the workers back on the job?

Well, I think I'll let Paul comment on the project side of it, but I think Paul was trying to give some context. This isn't the first time we've had a situation like this. We are disappointed. It does feel opportunistic. But history would suggest these tend to be short-lived. We'll work through it as we have in the past. Paul, maybe you can comment a little more specifically as to the project side of it.

As of right now, the project remains unaffected. Contractors associated with both the 24K project and the contractors supporting the operations are not off the job. The project is continuing. However, depending on the length of the strike, there could be impacts, but that would come after a likely couple of weeks' scenario, but as of right now, the project is unaffected.

Thanks. Maybe it's a question for Andrea on the liquidity side. I know you've drawn down some cash from your credit lines. How long do you expect to hold that cash on your balance sheet? Or when do you think you will be comfortable with the COVID situation or the global situation to bring that back down?

Thanks, Jackie. We would expect to repay the $750 million once we're comfortable, but enough uncertainty has lifted from this COVID environment. However, it's just tough to predict when that will be. I would say we haven’t used those funds, and we don't currently plan to. So it's just a matter of having enough time pass and feeling more comfortable as far as the uncertainty is lifted.

Yes, this is a difficult situation to predict all around.

Yes.

That's all I have. Thanks very much.

Our next question is from Carey MacRury of Canaccord Genuity.

Hi, good morning. You mentioned oil prices and FX rate, I'm just wondering based on what you think that can do on the dollar ground spaces and when we could see that?

Sure. I would say I'll hand that off to Andrea, but we are getting a greater sensitivity on currency than oil right now because of some infrastructural arrangements we have in place as it relates to oil. But Andrea, why don't you take a crack at that?

Sure. So we did see some benefit in Q1 related to currencies and oil. Our forecast for the year based on current spot prices for FX and oil is somewhere in the range of $30 to $40 an ounce. So, we are not a hundred percent exposed to fluctuations in WTI. And I'd also point out that forward prices haven't dropped significantly as the spot price.

Okay. And then maybe just some capital Q1 was relatively low compared to your previous guidance. I'm just wondering with COVID impacts, should we expect capital to sort of be down back to more towards the guidance range or do you think there is an opportunity to reduce that this year?

I can start and then Tomory may want to jump in. I would say the CapEx for Q1 is not atypical for it to be a little slower to ramp up on CapEx. And we've withdrawn our guidance, but…

I’ll add a couple of points on the side of your CapEx that’s happening here. A large amount of our capital expenditures this year are stripping related, and two impacts there are moving CapEx down. One, of course, is the oil price, which is a large proportion of the stripping dollars associated with fleet movement. So there's an oil price impact. But in the case of a couple of our sites, Fort Knox and Tasiast, our mining rates were impacted as a result of COVID-related restrictions, meaning we didn't have as many people on-site as we would have liked, and so mining rates were lower in the second half of March. Some of those conditions persist, particularly at Tasiast. So there might be a trend showing up on Tasiast capital stripping that is lower than we would have planned. The other factor driving capital this year will be the potential impacts to our large capital projects stripping aside. For example, La Coipa, we've already signaled a three-month delay on that project, primarily related to the inability to get the workforce ramped up to free stripping due to COVID-related restrictions. So there will be some slippage of capital and liquidity from this year to next year. The way I characterize it is we're probably going to end up lighter than we had budgeted on CapEx, but it's really too early to say where that number will land given the uncertainties that I have described.

Okay. And then maybe one last one on Tasiast the 16,000 tons a day, is that a function of just how the mill is performing or is there a bit of ore hardness mix in that?

It's all about mill performance. The mill is doing exceptionally well. We're getting used to operating it at these higher throughputs. What we are going to start to see over the coming months and quarters is continued incremental ramp-up in throughput as we start to complete elements with the 21K project for incremental debottlenecking; but it's not primarily an ore-related thing, rather than really good performance out of that mill as we get used to running it.

Great. Thanks, guys.

My next question is from Tanya Jakusconek of Scotiabank.

Yes, good morning, everybody. Paul, just continuing on Tasiast. You mentioned that should we continue to see travel restrictions upon expats for a long time, that we sort of will start slipping on that schedule. What sort of conditions are we talking about for that to happen? Are we talking about months here, or do we just need to see the situation lifted by the end of this year? What timeframe would cause slippage on that front?

If we were not able to get expats into Mauritania by July, August, we will start to see at first weeks and then potentially months being added to the schedule. However, as I alluded to in the last question, there are certain elements. This project is not an all-or-nothing project; there are various de-bottlenecking stages. Right now, we are working on a tailings booster pump that will allow us to get rid of that bottleneck and bringing in new interstate screens. Those two elements will come online regardless of restrictions, allowing for incremental throughput upside. But to specifically answer your question, if we can't get expats to site by July, August, September, we're looking at slippage in the project.

And in terms of other slippage, how are you doing on the pre-strip there? I mean, I would assume that less people on site will yield slower progress on that front, meaning we might see some impact?

Yes, correct. As I mentioned earlier to Carey, we do see some lower CapEx as a result of that at Tasiast. Now, what is the impact of that? The impact isn't huge because, one way or another regarding mining at Tasiast we have internal stockpiles. So should there be a delay in accessing the next phase of high-grade ore out of the pit, it just means you have to subsist on these lower grade stockpiles for a longer period of time. We’re into those stockpiles anyway in the back end of Q2 this year. It would just mean that stockpile periods are extended.

Okay. Thanks for that color. And maybe just a higher-level question, I appreciate, I mean, some of these things are fluid so may not have all of the answers; however, when you look at what the productivity of your workforces has been with this COVID, would you say that your productivity is still intact?

Yes. I think, go ahead Paul. Keep stepped up.

Yes, productivity is something we keep a very close eye on. We do weekly COVID response meetings, and we do track productivity. We have some really good things. For example, Paracatu just set a record: 18 straight days without any downtime. It's the first time that a site has done that length of a period of time. We do see highlights in the company where we're performing really well. But there will be an impact on productivity. For example, at Bald Mountain, the crew buses that go down from Elko previously, you could put 55 people on one of those buses; now you can only do 12. If Nevada doesn't relax some of those restrictions, then yes, we'll start to have these little impacts; we characterize them as paper cuts, but soon they start to add up to something that could be a bit more material. However, as of right now though, we have stresses on the productivity across the company, we are not terribly worried about them at this stage.

Well, that’s good. And if I could just ask one last question on just the additional costs from COVID, I mean it appears that they are being more than offset by the FX and oil tailwinds. Is that a fair comment?

Yes, absolutely.

Okay, great. Thank you, and good luck.

Thanks. Once again, if you would like to ask a question, please press star then one. Our next question comes from Anita Soni of CIBC World Market.

Hi, good morning everyone. Question just following up on the capital, but the free cash flow that you mentioned, I think, you said $700 million for the year; that's assuming the full capital spend that you had originally guided to?

Yes, and the existing hedges in place, it's just continuing as per our budget this year, but with that higher commodity price yes.

Okay. And then just a second question on the capitalized interest. Is that a good go-forward rate, the $22 million that went through investing activities this quarter?

Andrea, do you want to take that one?

Yes, we've provided guidance on capitalized interest at the start of the year. So that still stands. But yes, what you're seeing in the quarter is basically what you can expect for the year.

Okay, great. Thank you.

And we have no further questions at this time.

Okay. Well, thank you, operator. And thank you, everyone, for joining us today. Keep safe everyone, and we'll keep our heads down and keep running our business. We're looking forward to getting on the other side of this and catching up with you all in the future. Thanks for joining us this morning. Thanks.

Ladies and gentlemen, thank you for joining us today. You may now disconnect.