Kinross Gold Corp Q2 FY2022 Earnings Call

Good day, and thank you for standing by. Welcome to the Kinross Second Quarter 2022 Results Conference Call and Webcast. All lines have been placed on mute to prevent background noise. During today's call, there will be a question-and-answer session. I will now turn the conference over to Chris Lichtenheldt, Vice President of Investor Relations. Please go ahead.

Thank you, and good morning. With us today, we have Paul Rollinson, President and CEO; and from the Kinross senior leadership team, Andrew Frere, Paul Tomory and Geoff Gold. For a complete discussion of the risks and uncertainties, which may lead to actual results differing from estimates contained in our forward-looking information, please refer to Page 2 of this presentation, our news release dated July 27, 2022, the MD&A for the period ended June 30, 2022, and our most recently filed AIF, all of which are available on our website. I will now turn the call over to Paul.

Thanks, Chris, and thank you all for joining us. Today, I'm going to briefly review our second quarter performance, comment on our expectations for the second half of 2022 and update you on key developments across our portfolio. Then I will provide some comments on the state of our business and the compelling value opportunity our shares currently offer. After that, I will turn the call over to Andrea and Paul, who will provide more detail on our financial performance and on our operations. Beginning with our results. As a company that has met guidance nine out of the last 10 years, I am not happy with our operational results in the first half of this year. Given the challenges we have encountered, we are now targeting production at the low end of our guidance range. In order to meet the low end of guidance, we will need to produce nearly 400,000 ounces more in the second half than we did in the first. We see the increase in production coming from the following four areas. One, the movement to higher grades at Paracatu. Two, seasonally enhanced recovery from our U.S. heap leach operations with particularly strong performance expected from Bald Mountain. Three, maintaining the 21,000 tonne per day throughput at Tasiast that we have already achieved, and four, working through supply chain challenges at the La Coipa mill. I want to give you my commitment that we will be highly focused on the delivery of these objectives. On costs, with the slower ramp-up at La Coipa resulting in lower production overall, combined with inflation, we expect to be above our guidance for cost of sales in ASIC. Andrea will elaborate on this in a few moments. We remain confident in our expectation our cost per ounce will drop in the second half relative to the first half, given the planned increases in grade and production across our portfolio. During the quarter, we improved our liquidity by paying down $120 million of debt, and we plan to repay an additional $300 million to $400 million in the second half. We also continue to return capital to shareholders through our dividend program and plan to continue our buyback program in the second half. Moving to our projects. Things are progressing well. In particular note, yesterday evening, we released the study results for our 70% owned high-grade Manh Choh project. We are pleased with the results of the study and will be moving forward. During the quarter, we completed the sale of our Russian business for total cash consideration of $340 million, with $300 million received on closing. We continue to advance towards the closing of Chirano, which we expect will be finalized in August. These divestitures have resulted in approximately 70% of our production now coming from the Americas. Looking at our value proposition, we have a competitive reserve life index into the next decade, substantial production focused in the Americas, significant margin and free cash flow, a strong balance sheet and an attractive return of capital. Our top two assets, Tasiast and Paracatu, together, are expected to produce, on average, more than 1 million ounces annually into the next decade. The rest of our portfolio in Alaska, Nevada, and Chile make up an additional 1 million ounces, which we expect to produce annually. In addition, we expect our world-class Great Bear development project to carry our production into future decades. Before I turn the call over, I want to touch on the important area of safety, our first priority. Sadly, in July, we suffered a fatality at our Tasiast mine. This unfortunate incident is a reminder that despite our constant focus on safety, our work is never done, and we need to be continuously improving our standards and practices. We value the health and safety of our workforce above all else and are taking steps to continuously improve our risk management and safety systems to safeguard every member of our team. With that, I'll now turn the call over to Andrea for a review of our financial results.

Thank you, Paul. I'll cover financial highlights from the quarter and provide an overview of our balance sheet and then touch on our capital allocation. First, I'd like to point out that all the financial metrics I’ll comment on today exclude our former Russian asset and Chirano. As Paul noted, our second quarter production of 454,000 ounces was stronger than the first quarter, driven primarily by increases at Paracatu and our U.S. operations. Our Q2 cost of sales was $1,027 per ounce, which increased relative to the first quarter, largely due to increased compensation at Round Mountain and higher fuel costs at Tasiast. We expect cost of sales to decrease in the second half, which I’ll come back to. All-in sustaining costs of $1,341 per ounce were higher than Q1 due to the increase in cost of sales and higher sustaining capital. As we indicated in our press release yesterday, our costs are tracking above our previous guidance range, and we're now expecting full-year cost of sales to be approximately $900 per ounce and all-in sustaining costs to be approximately $1,240 per ounce, due mainly to lower production from La Coipa and inflation. On inflation, we previously incorporated a 7% increase in our operating costs for the year. We now expect the impact to be around 10% to 12% for the full year, and we factor that into our revised guidance. For CapEx, our initial assumption of 10% to 15% inflation still holds. Our examination of $900 per ounce incorporates lower costs of sales in the second half at approximately $830 per ounce. We're confident in this reduction, which comes from the ramp-up in production across the portfolio and the benefit from increased lower-cost ounces at Tasiast and La Coipa in particular. Our second quarter adjusted operating cash flow was relatively consistent with Q1 at $252 million. CapEx of $150 million in Q2 was higher than Q1, but is still at a lower pace than what we planned for the second half. We still expect to spend our guided CapEx range of $850 million by year-end. Free cash flow during the quarter was $108 million or $103 million excluding working capital changes, which was a significant increase over Q1. We expect free cash flow to increase further in the second half, particularly in Q4, as our production increases and costs decrease, subject to future gold prices. With regard to our balance sheet, our financial position remains strong and is expected to strengthen further, both in the second half of the year and going forward into 2023 and 2024. We maintained an investment-grade credit rating from our three rating agencies, two of which reaffirmed ratings during the second quarter. We ended the quarter in a solid cash and liquidity position with $719 million of cash and approximately $2.1 billion of total liquidity. As Paul mentioned, we repaid $120 million of debt in the second quarter with another $100 million paid down in July and plans for continued repayments going forward. Our trailing 12-month net debt-to-EBITDA ratio improved slightly at June 30 to 1.7 times. We expect this ratio to continue to come down throughout this year and into next year. Finally, on capital allocation, as Paul noted, we expect to continue with our dividend, which we've planned for the long term, including under lower gold prices. Our dividend now amounts to a compelling yield of nearly 4%. We also plan to maintain our baseline share buyback program at the same level as our dividend. But as always, we're monitoring gold prices and inflation as we think about our capital allocation priorities. With that, I'll now turn the call over to Paul.

Thanks, Andrea. This morning, I'll provide key updates on our operations, share highlights from our decision to proceed with Manh Choh, as well as details on our ongoing growth projects and share some news from exploration. Across the portfolio, Q2 improved compared with Q1, but it was not without challenges, as Paul mentioned. Looking forward, we remain on track to ramp production up in the second half of the year, driven by planned higher grades and throughput levels across the portfolio. I'll provide a few examples of this, starting with Tasiast. Tasiast delivered a good second quarter with 129,000 ounces produced; head grades remain strong in Q2, and we're encouraged by the ongoing throughput ramp-up, regularly achieving more than 21,000 tonnes per day. The outlook on Tasiast remains strong, and the site remains on track for a record year with over 600,000 ounces of production. We're expecting a production increase of at least 30% from Tasiast in the second half of the year, largely driven by sustained throughput of 21,000 tonnes a day and increasing grades coming out of West Branch 4, where we are mining now. In July, for example, the mill grade averaged just below 3 grams per tonne. The second phase of the project ramped up to 24,000 tonnes a day also remains on track for completion in the middle of 2023, with engineering substantially complete and procurement well underway. Construction of the solar power plant at Tasiast is advancing with detailed engineering ongoing with procurement underway, with initial site activities expected to start later this year. At Paracatu, production for the quarter was 129,000 ounces, up roughly 20% compared with the first quarter. We expect to see higher grades in Paracatu through the remainder of the year, as mining enters a higher grade ore in the southwest area of the Paracatu planned. The processing of lower grade stockpiles is largely complete for this year. Throughout July, we have been averaging a grade of 0.45 grams a tonne, which is approximately 30% higher than the first half, and we expect to produce around 50,000 ounces this month alone. I'll now move over to La Coipa. As Paul mentioned, commissioning of the mill progressed more slowly than initially planned in the second quarter. However, La Coipa is making progress and will be a meaningful contributor to our portfolio going forward in terms of production and cash flow. The temporary delays were primarily driven by issues commissioning the pumps and some of the other components in the mill, exacerbated by global supply chain problems, which have hindered the availability of critical components. Mitigations are ongoing in July, and it is showing improving throughput levels, including recently reaching 10,000 tonnes per day. With the commissioning of the second line of the plant underway, we now expect La Coipa to reach sustained throughput of 13,000 tonnes per day in the fourth quarter. These issues have resulted in a production deferral of approximately 60,000 ounces. To reflect this delay, as well as a higher gold to silver price ratio than initially assumed in our guidance, we have revised our expected La Coipa production for the year down from 200,000 ounces to 125,000 gold equivalent ounces. We do not expect the delay to impact production going forward once we're ramped up. So, production in 2023 and beyond is intact, and the ounces deferred this year will be realized in future quarters. Mining rates have also ramped up as planned, and we now have a stockpile of 800,000 tonnes at a grade of 1.2 grams per tonne gold equivalent ready for the mill. Moving to Round Mountain. The site optimization project remains on track for completion later this year. Overall, there are no significant changes to our expectations from our most recent comments. We expect to develop Round Mountain according to the following sequence: Phases W1 and W2, two sub-phases of Phase W will be mined as an open pit and are the priority for the next 2 to 3 years. Then Phase S will be added starting in Q1 of 2023, and we received the necessary permits for this phase this past month in June. Following that, we expect to mine W3 and W4, which are the last two sub-phases of W. We continue to evaluate the trade-off between underground versus open pit for these phases. Looking longer term, we're advancing the study of underground options for both Phase X and Gold Hill, both of which are showing promise. We'll provide more details later this year as we approach the completion of our optimization study. To recap, our confidence in a strong second half relates to improved grades as for our planned mining sequence of Paracatu. At Tasiast, production growth is coming from a combination of sustaining throughput at 21,000 tonnes a day and higher grade ore from West Branch 4. At La Coipa, where we are progressively advancing the commissioning of the second line of the plant. Lastly, leaching at the U.S. sites is picking up as expected. I will move to an update now on the Manh Choh project. We are pleased to announce that we're proceeding with the execution of the Manh Choh project in Alaska. Manh Choh provides a robust growth project for Kinross, adding high-grade and low-cost production to Fort Knox. The project returns remain attractive despite the impact of inflation. Our preproduction capital investment of $190 million includes a higher than typical contingency to allow for the possibility of future inflation. The acquisition of permits is also progressing well. Earthworks and road construction will be the priority for the remainder of 2022, setting us up for a successful field season in 2023, and we expect to be in production during the second half of 2024. Before turning the call back over to Paul, I'll provide a brief update on our exploration programs. Starting with Great Bear, as our exploration program advances, the results reaffirm our expectation that this will become a world-class mine. We remain on track to complete the 200-kilometer exploration drill program for the year. We continue to receive positive drill and assay results that confirm gold mineralization, which is open along strike and depth. We received exciting results at depths below 500 meters. Of note, a recent drill hole from earlier this month intercepted 18 meters of 5.8 grams per tonne gold, including 2 meters of 41.8 grams per tonne at a vertical depth of approximately 550 meters. Results like these support our vision for a sizable underground mine to complement the open pit. Also, the 35,000 meter grade control program has been completed, confirming our initial view on the high-grade core of the LP Fault zone. This program has improved our understanding of continuity and grade distribution. On this topic, I want to clarify a point we made during our June 28 project update session that may have been misunderstood. The high-grade nature of the open pit that we originally envisioned has been confirmed. In addition to this, we've discovered low-grade material that is incremental and will be stockpiled to ensure we maintain high-grade mill feed. So this is good news and expect it to add value. Environmental baseline studies have begun and all key work packages have been awarded for scoping level engineering work. All in all, we remain very encouraged by the results of our work to date and look forward to disclosing our initial resource with our year-end results. Other exploration highlights in the portfolio include encouraging drill results at our Curlew Basin project, extensions to the Round Mountain Gold Hill veins identified in the late part of 2021. At Curlew, drilling from underground has improved the understanding of mineralized vein orientations. In addition to encouraging results from the Stealth and Galaxie veins, initial derivative results from the lower portal zone show excellent potential to contribute to overall resource growth. We remain on track to report an expected mineral inventory of 1 million ounces after year-end results. At Round Mountain Gold Hill, drilling has extended the main and Alexandra veins over 300 meters along strike and 200 meters down dip. New geophysical data confirms multiple deposit scale trends open along strike at Gold Hill. We are encouraged by the significant strike continuity in the open, untested nature of the trend. Meanwhile, Phase X, plans for the construction of an underground exploration drift continue to advance well and remain on track to commence in the fourth quarter. And with that, I'll turn the call back to Paul.

Thanks, Paul. Despite operating challenges in the first half, our operations continue to advance towards our plans, and we are confident in our outlook for a strong second half. Our company continues to generate meaningful free cash flow, and we think the value our shares offer has never been better. We have an improved geopolitical footprint, a robust production pipeline with exciting projects and exploration to come, a significant free cash flow profile, a strong balance sheet and an attractive return of capital program. With that, operator, I'd like to open up the line for questions.

Thank you. Your first question comes from the line of Fahad Tariq of Credit Suisse. Please go ahead.

Hi, good morning. Thanks for taking my two questions. First on La Coipa, you mentioned mitigation is ongoing. Can you just give some more details on whether the spare parts that are needed have been procured, and what else is needed from a supply chain perspective to get the mill kind of where you want it to be?

Yes. Thanks, Fahad. The nature of the issues as we are commissioning the second line in the filter plant. We had some seals and bearings fail on a number of the pumps. We've placed orders for both new components and new pumps, and we have been steadily sourcing them. We don't have them all yet, but we've been steadily having new pumps and components arrive at site, and we expect to have everything we need to fully ramp up throughput in the next couple of months.

Okay. Great. And just switching gears to Manh Choh. Obviously, with the investment decision and the positive feasibility study results. Why is this still excluded from 2024 production guidance?

We typically do our multiyear guidance at the beginning of the year. So it's simply a mechanical step on when we update guidance.

Okay. So it's not a function of expecting lower production in the beginning of the second half of 2024, okay?

No, no. We just haven't updated our multiyear guidance.

Understood. That's it for me. Thank you.

Thanks.

Your next question comes from the line of Anita Soni of CIBC World Markets. Please go ahead.

Hi, good morning, Paul, Paul. And thanks for taking my question. The first one is just related to – is regarding CapEx. So if I'm correct, you've spent about $250 million in the first half of the year, but you reiterated your guidance for $850. Does that mean that - and correct me if the $250 million is wrong, but does that mean that we'll have a heavy CapEx spend in the second half of the year and you'll catch up? Or should we be gearing more towards minus and on the cost minus 5% of the capital?

Anita, it's Andrea. Yeah, I mean, we maintained our 850 guidance. But you're right, that's a range, plus or minus 5%. We were low in the first half, but we do expect CapEx to ramp up in the second half for a few reasons. Capital stripping, we expect to increase, in particular at Tasiast and La Coipa, and then we'll have some additional CapEx for now at Paracatu, and then spending at Manh Choh for the higher spending of the 24K project. Those are kind of the three things that factor into higher CapEx in the second half.

Okay. And then on costs. I appreciate that you don't give guidance out for the coming years, but until February. But I'm just trying to understand, given the $900 per ounce you've guided to this year, and I know that you're guiding to like lower cost in the back half of the year. But should we - should we be using a lower cost in the back half of the year as the run rate for next year? Or should we be thinking that inflationary pressures may offset the volume increase that you have planned for next year?

It's a bit of a tough one to call, Anita. It really is around and from an operational perspective, we're comfortable with the second half with a sort of a numerator denominator production grade effect. But the more difficult part to call, as you're alluding to, is the inflation. And again, as we said at the beginning of the year, we guided inflation in February at 7%. We said we'd give an update at midyear, and here we are essentially updating now to 12%. So trying to predict how that's going to play out next year at this point. Hopefully, it abates, but that's going to be the wild card.

Okay, thank you. That’s it for my questions.

Your next question comes from the line of Carey MacRury of Canaccord Genuity. Please go ahead.

Hi, good morning, everyone. Maybe first on La Coipa. I know originally, the plan was to do 200,000 ounces. I'm just wondering what that ramp-up looks like now through Q3, Q4 into 2023?

Yeah. So because of these delays in the ramp-up, we're now running through 8,000, 9,000 tons, had a few days at 10, and we want to ramp up to 13,000 tons by the fourth quarter. If you make that adjustment into allowances, as I said in the prepared remarks, we are moving La Coipa production from 200,000 to 225,000.

I would just add to that, again, just for context, Carey. I mean, this is obviously frustrating. We're not happy with it. The mine continues to operate. It's - this is not a highly technical issue. It's - it is a ramp-up. It's pretty straightforward. It's really just about getting those spares, those parts for equipment. We know what the issue is. We're on top of it. We've just got to source the material and get the job done.

And we've got in all - 2023.

Yeah. 2023 will be as per plan. As Paul said, this is just a matter of ramping up the throughput. And we've got the order, we got the stockpile there at 1.2 grams waiting to be fed.

Okay. And then maybe just switching to Round Mountain, just on the cost there. I mean, obviously, a big jump in costs despite a jump in production. Just wondering if you can add a bit of color on what happened there this quarter?

There are several drivers there. One is just inflation. Our Nevada sites are particularly impacted by cyanide and lime cost increases, particularly on cyanide. It's also a function of a greater proportion of heat ounces versus mail ounces and also timing of where we are in stacking versus recovery. But even in the bigger picture, a way to look at it is, it's more than anything a function of the lower production number. And as we said on previous calls, our intent is to ramp Round Mountain back up to that 300,000 ounce a year figure, which will get the cost structure back in line. So big picture, it's really about production scale. But in this particular quarter, it was impacted by a number of those specific issues that I just mentioned.

To cost you to go down to like, like $1,000 an ounce or something like that?

Well, we're going to have to finish our optimization work. But as we ramp up to 300,000 ounces, which we intend to do in 2024, the costs will trend back down. That will be the - those are the last bids that we're doing on this optimization study of the cost profile, but the costs will come down as production goes up.

And maybe just one last question on Tasiast. I noticed the recoveries were 89, which is just quite a step down from the last few quarters. Just wondering what happened there?

Yeah. As we got into the high-grade material, we encountered some high sulfide material and that pulled the recovery down, but we've been able to address that through better oxygenation and blending the sulfides with the non-sulfide material to get it back up. And over the last few weeks, we've got that back in line. So it's really due to some sulfide that we encountered.

Okay. Thank you.

Your next question comes from the line of Mike Parkin with National Bank. Please go ahead.

Hi, guys. Just one for me. With an NCIB outstanding and you're still generating and expected to generate stronger free cash flows. Is there a thought towards a bit of a balance now in terms of still focusing on the balance sheet in terms of debt repayment, but given where the share price is, maybe putting some capital to work towards repurchase of shares?

Yes. Mike, that's exactly the plan. So we are maintaining both the dividends and the buyback on top of the dividend. And obviously, at the same time, we're paying down debt. So we're doing all of the above. I think we're taking a bit of a cautious approach as we think about where we are in the macro sense, where is the commodity price going? Where is inflation going? We'll see how that takes us. And certainly, any margin expansion through higher gold prices, we'll think about how we might ramp up either the buyback or accelerate the debt repayment, but we're comfortable doing all three as we sit here today.

Okay. Thanks, guys.

Your next question comes from the line of Tanya Jakusconek of Scotiabank. Please go ahead.

Good morning, everyone. Thank you for taking my questions. Paul Tomory, I just want to circle back to just a bigger picture theme, which is obviously instrumentation getting these pumps in and spare parts. And just wondering how you are looking at your inventories at site. Are we looking at adding additional inventories for site given some of these supply issues that say La Coipa? Following that, as we Tasiast and we're expanding throughput from '21 to '23 by mid-next year, do we have everything we need for that one on site?

So there's a couple of questions in there, and I'll hit a few anecdotes on this. So as we all know, global supply chains are stretched, and the availability of certain parts has really been impacted, particularly on lead times. We have, over the past 6-8 months, been on a campaign for critical spares, and we've ramped up inventory levels where possible, where the vendors had the capacity to do that. So yes, we have been squirreling away critical parts and components where possible and building up our warehouse levels. In the specific case of La Coipa, just to give an anecdote, we're seeing certain components with 40 to 45 week lead times on things that previously would have been readily available. It's difficult, in some cases, to predict specifically where some of these components will really be impacted. And there's always a trade-off between ramping up warehouse just to buy everything that you can.

We manage inventory as carefully as possible.

Yes. We manage the inventory as much as we can while ramping up critical spares where we think we can anticipate failures, but it's a difficult one to get right all the time. And in certain situations, no amount of begging and pleading with suppliers to get you more equipment or components will help. Sometimes the supply chain is what it is, and we have to source alternative supply. So that's what we're doing here at Tasiast, as we are buying pumps from perhaps not the quality that we would normally buy, put in place a substandard component and then wait the long lead time for the better piece of equipment. So yes, we are managing; we are buying replacement components proactively where we can, but it's not something we can do perfectly everywhere.

I am just going to jump in and add some context here. Obviously, we tested all this equipment; we ran tests on these pumps as part of our ramp-up to restart La Coipa, and the pumps all worked fine. However, we found that with a constant load and with the ramp-up of the operation, that's where we've seen the failures. It wouldn't have been routine for us to have this amount of spare parts given the positive testing we conducted. But as we've continued to push the throughput, that's where we've started to see some failures, and that's why we're scrambling to get these parts.

And a quick reminder, this is a plant that was down for 10 years, and there are over 80 pumps in the filtration plant. We're probably talking about 8 or 10 that are problems, or about 10% of the total. We know what it is. We're focused on it, and we're chasing it down.

Given the experience that you're seeing there and now knowing what is taking some of these supply chain issues or taking a long time to get the parts, are you seeing anything that you're concerned about for the Tasiast expansion? Anything that—La Coipa—south but maybe something else in the supply chain that you're now definitely focused on to make sure you have everything for Tasiast?

Well, it is a hard lesson learned, and we are reviewing all of our sustaining capital projects and major projects for similar weak spots, where are there components or key pieces of equipment where we should have capital spares on hand. So yes, we are, from a hard lesson learned, reviewing critical components across the rest of the portfolio.

Is there a sort of net debt-to-EBITDA level that you're looking at before you feel comfortable with your debt where you want it to be and your share buyback becomes more active? I know you're targeting your net debt to EBITDA under one by year-end. Is that still possible?

Yes. I mean, I think I did previously say we expect that ratio to be at or slightly below one, just given production now being at the low end of our guidance range. We'll probably end the year slightly above one. That's by no means uncomfortable for us. I think the message there is just that we are working to strengthen the balance sheet. We're comfortable where we are, but we do see it getting stronger by the end of this year and into next year as well.

I guess we've always thought of the buyback as the flexible option in that equation. Again, we're going to take our cues there really from a margin perspective. As we continue to approach that debt metric, if we get some benefit in the commodity, then that's where we'll have the flexibility to ramp up on the buyback.

Thank you for that. And if I could just squeeze in one more question for Paul Tomory, it's just back to the inflationary pressures. I'm just trying to look at your key components of your cost structure. I'm trying to understand where you're seeing more inflation, including labor. Maybe just touch on the math because component—are you seeing continued labor inflation? Or is it mainly in the consumables and fuel that we're seeing for everybody else? I'm just trying to get the components and just see if anything has peaked for you in terms of consumables?

So the one area where we are seeing a peaking in terms of cost is in oil prices, with things flattening out around $100. In other key commodities, we continue to see price increases, but perhaps at a flatter rate of increase. The most impacted items include cyanide, lime, ammonia, and explosives, all of which are essentially tied to the petrochemical chain. In terms of labor, we are seeing pressures primarily in the United States, and to a lesser extent, in Brazil and Chile. So to clarify, we are indeed seeing inflation across the board. We are observing signs of some attenuation in fuel costs. The rates of increase in some other commodities aren't as severe as they were previously, so there may be some positive news in that the worst of the rate increases could be behind us.

Thank you. I appreciate your time. I'll pass it on to somebody else.

And this concludes the question-and-answer session. I will turn the call back to Paul.

Thank you, operator, and thanks, everyone, for joining us this morning. We look forward to catching up in person in the coming weeks. Thank you.

This concludes today's conference call. You may now disconnect your lines.