Centerra Gold Inc. (CG) Earnings Call Transcript & Summary

Good afternoon, everyone. This is Mike Jalonen of Bank of America Securities, and good evening for those listening overseas. We're very pleased to have from Centerra Gold, Scott Perry, President and CEO. And Centerra, as many of you know, is a mid-tier gold producer, around 800,000 ounces a year. Scott's going to have a presentation with the slides for 20 minutes, and then we'll go to Q&A. And just to remind everyone, you have to move the slides manually. And Scott, I'll turn it to yourself.

Okay. Thank you, Mike, and thanks, everyone, for attending the Centerra session. Just starting off on Slide #3. This is our typical sort of introductory slide, but some of these bullet points, I would like to reference, just in terms of setting the stage with regards to Centerra and where our business model is going. So looking at the top left section here, just the first bullet point, just in terms of scale, you can see we produce up to 820,000 ounces of gold per year at an all-in sustaining cost as low as $820 per ounce. We believe this year, the second bullet point, is going to be an inflection point for Centerra. Our third operating gold mine is now coming online. We expect to be declaring commercial production here in the second quarter of this year, and it's going to make for growing diversity within our portfolio moving forward. That's important to us. And it has the potential to actually be our lowest cost operating asset, which is fantastic. The third bullet point, we had a strong quarter in the Q1. We produced approximately 190,000 ounces of gold. So if you simply annualize that, it suggests we're in good stead with regards to our full year gold production guidance. And you can see the corresponding all-in sustaining cost was $712 per ounce. I believe this is low cost. This is very competitive. And a reference to our full year guidance, again, you can see we're in good stead coming into the year, starting off strongly. Where all of this resonates is in the fourth bullet point, we reported company-wide positive free cash flow of $77 million, which is fantastic. So the business is certainly benefiting from the strong production, and you can see our realized gold price during the quarter was just under $1,500 per ounce. But it -- look -- when I look at -- what gets me excited is when I look at the business and our potential profitability and cash flow generation potential moving forward, knowing that we're in a rising gold price environment, we've seen favorable devaluations in the local currencies where we operate, devaluations in oil prices, and that flows through to our diesel fuel prices. It's really setting the stage for robust margins moving forward. And on top of that, in terms of our Turkish mine, Öksüt, which is now transitioning into operations, moving forward here, we're expecting progressive increases in its gold output profile. And again, that's going to underpin a very strong year at Centerra this year. Just given the strong operating profile and the strong free cash flow, you can see here the fifth bullet point, we've reinstated our dividend program. It's a quarterly dividend of CAD 0.04 per share per quarter. And for the year-to-date period, we've now declared 2 of these dividends. The bullet points on the bottom left, I'll just reference 1 bullet point, which is the second bullet point in the bottom left quadrant. At Kumtor, we've had a lot of success in our exploration. I'm going to talk about this on an upcoming slide, but we think that's very meaningful in terms of potentially demonstrating that we're going to have some further increases in terms of Kumtor's reserve asset life moving forward. Just moving on to Slide 4, just in terms of our environmental, social governance profile. Obviously, this is something that we're very focused on as well as the industry. And you can just see some of the key highlights here. So obviously, just running down the bullet points, very focused on safety and 0 harm environment. Likewise, in terms of our social license to operate, we're currently sitting at 81 consecutive months without any business interruption, which is fantastic. Third bullet point, we've had no reportable environmental incidents, obviously, as it should be. And then more and more, we're now focusing on creating a diverse and inclusive workforce. This is a carry-on from our agenda diversity focus of last year. And then just looking at the last bullet point, we are a member of the World Gold Council. And if I just move to Slide 5, we are a signatory to the World Gold Council's Responsible Gold Mining Principles that was recently rolled out in 2019. As part of this rollout, we actually volunteered to have Kumtor be the first site in terms of just ascertaining how these principles will work. And we're quite pleased with how well Kumtor was evaluated. We're now looking to -- here we are in 2020, and we're now rolling it out in earnest and looking to roll these out at all of our operations within Centerra. If I move on to Slide 6. Slide 6, just on our -- it's like a track record of our final year-end results in terms of gold production and all-in sustaining costs just relative to what was the original midpoint of the guidance at the beginning of each such year. And you can see, we've now, on a company-wide basis, we've achieved 7 consecutive years in terms of gold production, meeting the midpoint of guidance. And likewise, in terms of all-in sustaining costs, which is illustrated by the green line chart that you can see that we have been delivering or outperforming favorably against our original guidance. This speaks to execution or credibility, obviously, doing what you say you're going to do. But I think it also just speaks to the underlying asset base whereby when we plan -- put our business planning together as we strategize, we have that additional comfort and confidence that this is a portfolio that you can reliably, consistently and sustainably plan around in terms of targeted performance. Slide 7. It's a busy slide. There's a lot of highlights here just from our Q1 results. I'm just going to cherry-pick a few bullet points. The third bullet point, obviously, we're really excited to see Öksüt, our project in Turkey, achieving first gold pour. We've delivered this project slightly ahead of schedule and under budget. We're expecting to be declaring commercial production here in Q2. And again, it's going to be our third leg of the stool and potentially our lowest cost asset. So it's going to definitely play an important role just in terms of profitability and free cash flow generation moving forward. If you move down another 5-or-so bullet points, there's a bullet point here in the middle, just consolidated free cash flow of $77 million, that was on a company-wide basis. You can see in parenthesis just the individual contributions from our assets. So Kumtor really is a world class operation. Last year, generated approximately $300 million of free cash flow. And you can see here in Q1, generating $96 million of positive free cash flow. So again, just really setting the stage for a strong year this year. The third, last bullet point, we made no change to our guidance for 2020. We've been very fortunate just in terms of the COVID-19 pandemic. All our operations are currently operating at full capacity, so we've continued to maintain our guidance for 2020. The second last bullet point. I mentioned that earlier, we've reinstated our dividend program, and that obviously just reflects the company's confidence in our operating plans and our financial profile. If I move to the next slide, on Slide 8. There's a chart here in the bottom right-hand corner on Slide 8, and it's -- I think it's a powerful chart just in terms of providing some visibility or line of sight on where the business could be going in the current environment. So you can see the gold column, we made $77 million in positive free cash flow on a company-wide basis, and you can see the realized gold price. If you look at the prior quarters, so Q2, Q3, Q4 of 2019, the level of free cash flow was relatively modest, but it's somewhat misleading in terms of the illustration here on this chart because we were using a lot of the positive free cash flow from Kumtor and Mount Milligan to fund the construction at Öksüt, which is the project in Turkey. As we exited 2019, that construction was essentially complete. We're now transitioning into operations. You don't see those significant construction capital expenditures, and you can see here in Q1 of 2020 just the immediate uplift in terms of company-wide free cash flow. I'm excited about this because as we move forward now, quarter-over-quarter, if I look at Q2 as an example, we're in a stronger gold price environment. We're seeing more favorable exchange rates. We're seeing lower diesel fuel prices. And on top of that, we know quarter-over-quarter we're expecting progressive increases in the gold output profile of Turkey, so it just bodes well for our ability to continue to demonstrate this very meaningful company-wide positive free cash flow. Just the other chart in the bottom left-hand corner there is kind of a snapshot of the balance sheet. You can see as at March 31, in the columns to the right, we've now transitioned into a positive net cash position of some $58 million. And I think as we move quarter-over-quarter through the year, as we move through the calendar year here, we would be expecting to be showcasing positive free cash flow, and we'll be expecting to build out this positive net cash position. Just on Slide 9. Slide 9, we're just illustrating Centerra's free cash flow yield just relative to the comparative peer group here. And I think more and more, now that we're into a phase of Centerra where we're not building or constructing anything, we're just operating our existing mines and just looking to maximize free cash flow, I think we have the potential to build an industry-leading sort of mid-tier, from a -- a mid-tier gold business, especially from a free cash flow perspective. You can see in terms of our free cash flow yield that we're in the sort of top-tier here. I think that presents very well. Myself and the team, when we're strategizing in terms of the go-forward, we're just very focused on execution. And we think our shareholders will be served very well if we just continue to deliver and showcase that free cash flow quarter-over-quarter, so an exciting time for us. The next slide on Slide 10 is just our valuation multiples relative to that sort of similar comparative peer group. And I think it illustrates that Centerra still trades relatively inexpensively. And again, that excites us. I think it shows we've got some headroom here that we can still grow into as we move forward. I think when I look at our business plan, we've got all the ingredients we need. We know we've got the right portfolio composition, we've got the assets, we've got the people, we've got the financial horsepower. But more and more, it's just really blocking and tackling and putting our heads down and just executing. And again, just showcase quarter-over-quarter that positive free cash flow. And I have to believe that's going to underpin a potential expansion in these valuation multiples, which will again serve our shareholders very well. Slide 11, just in terms of our all-in sustaining costs. You can see in 2019, relative to the comparative peer group, we are in the sort of first tier, which serves us well. It differentiates the business well. And then the chart on the right just shows the year-over-year change, so you can see we've been relatively consistent. The next slide on Slide 12 just reiterates that point a little bit further, but this time, what we're doing is just illustrating our all-in sustaining cost profile as well as our individual assets within our portfolio. And you can just see we're illustrating that against the world industry all-in sustaining cost curve. So in terms of our portfolio, we tend to sort of sit in the first to second quartile, which is advantageous. You can see Centerra company-wide guidance for this year as low as $820. That positions us well to always make sure that regardless of where we are in the prevailing sort of gold metal price environment, that the business is always going to be profitable and always going to be well positioned to generate positive free cash flow. On the left of this slide of the chart, you've got Oksut, and that's the guidance for this year. So this is our new operating gold mine. Looking to declare commercial production here in Q2. As you can see, it's potentially going to be our lowest operating cost asset. So it's going to favorably complement what is a already existing low-cost profile for the company. And then on the very far left is the Kemess and Greenstone, which is our 2 Canadian-based organic growth opportunities. And again, potentially lower cost than the existing portfolio, which is advantageous. If I move on to Slide 13, just on Kumtor itself. You can see the table here on the top left. If you look at the 2019 column, we had a very strong year last year. We produced 600,000 ounces of gold at a very low competitive all-in sustaining cost of $598 per ounce. That resulted in some $300 million of positive free cash flow last year, which is the second bullet point on the bottom left. Back to that table there on the top left, if you look at the column on the far right, this is our guidance for this year. We're guiding for up to 560,000 ounces at all-in sustaining costs as low as $750 per ounce. And as you saw in the first quarter from a previous slide, in the first quarter, the mine generated $96 million of positive free cash flow, so it's off to a very good start. I think it's going to do well in this kind of gold price environment. If it sustains over the course of the year as well as the current sort of diesel fuel price environment, it's just setting up really well for Kumtor. And what I should probably touch on is, when we look at that diesel fuel price environment, in terms of Kumtor's operating cost structure, depending on the prices, but typically up to 20% of Kumtor's operating costs are actually denominated in diesel fuel pricing and consumption. And so if I look at our guidance, for example, we were assuming around $0.50 per liter is what we'd be paying for diesel fuel. And some of our most recent purchases have been as low as $0.35 per liter. So it's a significant cost input for us. But just looking at the current environment, it could be very favorable for us just in terms of the potential profitability moving forward. The next slide, on Slide 14. We've been very focused on exploration at Kumtor. We reinitiated this program back in 2018, and that was really on the back of the strategic agreement that we put in place with the government of Kyrgyzstan. It really resulted in a clean slate and gave the company and the Board that much more confidence that in terms of doing business in Kyrgyzstan, it's going to be a good environment moving forward. So we've actually started to reinvest into Kumtor. Last year, we invested 20 -- just under $20 million in exploration. And you come over the slide on Slide 15, we're really seeing the dividends of that program. In March of this year, we announced our company-wide reserves and resources. But as we're illustrating here, the table on the right, we've seen significant growth in Kumtor's measured indicated resources. We're now reporting 6.275 million ounces of M&I resources. And the table on the left is how that inventory stood in the prior year corresponding period. So you can see the bottom bullet point, there's been a 112% increase or some 3.3 million additional ounces of M&I resources. And just looking at the in situ grade, a lot of this new material is actually at a higher grade. This bodes really well in and of itself in terms of future mine life potential. And we're working on that right now in earnest. Our technical engineering team are working on a new 43-101 life-of-mine plan for Kumtor and we're hoping to publish that in the back half of this year. And with that new 43-101 life-of-mine plan, we'll be looking to convert a significant amount of this new material into reserve category. And I think that's going to -- that's going to present very well in terms of showcasing a meaningful expansion in Kumtor's open pit reserve life moving forward. And if you reflect on some of those annual free cash flow numbers that I was quoting earlier, say last year, for example, $300 million of positive free cash flow. Every year that we're adding at Kumtor, with that kind of level of profitability, it's very meaningful in terms of the asset's -- underlying net asset value. Just moving on to Slide 16 on Mount Milligan. The table in the top left, 2019 produced 183,000 ounces of gold, which is above the upper end of our guidance, so we had a very strong year from a production perspective. And then you can see the 2020 column, we're guiding for up to 160,000 ounces of gold this year, as well as copper production of up to 90 million pounds. Last year, the third bullet point in the bottom left, it generated $27 million of positive cash flow and already in Q1 of this year, Mount Milligan generated $22 million of positive free cash flow. We had had some challenges with water availability in the prior year period. And where that was a challenge, was it just -- it was reducing our ability to operate the mill at full capacity in the winter season at the beginning of 2019. We had a very concerted effort last year focusing on groundwater exploration, and it was very successful. We identified a new aquifer, which was commissioned and permitted and where we're pumping from, and that's supplying 1/3 of our water requirements. So we don't see water being a challenge at Mount Milligan this year, which is fantastic. Next, Slide 17 is just a summary of the 43-101 life-of-mine plans for Mount Milligan. You can see in the very bottom row, we're expecting positive free cash flow year-over-year. And the second row from the top is just our gold price assumption, and we were assuming a Canadian dollar exchange rate of CAD 1.25 to the U.S. dollar. Slide 18, on Öksüt, the new project in Turkey transitioning to operations as we speak. We're expecting commercial production here in Q2. You can see the third bullet point on the bottom left, we're guiding for up to 100,000 ounces of gold production this year with an all-in sustaining cost as low as $650 per ounce. As you come to the slide, Slide 19, you'll see it's progressively increasing our quarter-over-quarter gold production profile here as we continue to ramp up. Again, in the current economic environment, I think there's very good potential that we'll be transitioning into sort of meaningful positive free cash flow here in the back half of this year, which is obviously going to be fantastic in terms of complementing what I believe is already strong profitability in our business. The bottom images, you can see the heap leach facilities, obviously, crushing and stacking is well underway and all of this material is under irrigation and leach, and it's been great in Turkey. We delivered this project slightly ahead of budget and -- in terms of time line, and under budget in terms of cost. That's been fantastic. Just the next few slides is really on our organic growth opportunities within Centerra. The first one on Slide 20 is Kemess, which is in British Columbia. So we've got 2 Canadian sort of domiciled opportunities. Kemess, you can see the title of the slide, we've got $1 billion replacement value of infrastructure here sitting on the surface. This is a fast producing property. You see the bottom right map, located some 300 kilometers from Mount Milligan. So it's kind of in our backyard. If you come over to Slide 21, we've got 2 separate deposits here into -- they're both copper-gold porphyry deposits, both of them are essentially underground block caving opportunities. You can see Kemess underground, the table on the left. Sequentially, that would be the first deposit to be developed, if you were to sanction a construction decision. And both of these deposits together cumulatively represent more than 25 years of potential mine longevity. So a lot of option value here. In terms of the economics, the rate of return that we're currently seeing in a $1,250 gold price assumption, which is what we tend to use, the rate of return is anywhere between 10% and 15%, which is below our hurdle rate. So I don't see us making a construction decision here, but we continue to work on optimization studies and trade-off studies and looking what we can do to improve that value proposition. Greenstone, the next slide on 22. This is our other Canadian organic growth opportunity. First bullet point, it's an equal joint venture with Premier Gold, another Canadian gold mining company. The title of the slide is, I believe, is accurate, this being one of the larger undeveloped open pit gold mining opportunities here in Canada. You can see the second bullet point. It's got a significant endowment, 4.7 million ounces of delineated open pit reserves. And if you look at the feasibility study highlights on the bottom left, you can see the rate of return, it was around 14%. And that was in a $1,250 gold price environment. So again, that's the gold price we tend to assume. The rate of return currently wouldn't justify a construction decision, but we continue to work on derisking the asset. We're working right now in additional permitting to get a construction permit. And we're working on sort of detailed design engineering, just trying to make sure we're doing whatever we can to surface and daylight value here in the future. But having these 2 assets in our portfolio, it puts us in good stead just knowing that we do have these future growth opportunities. Slide 23. We've got the molybdenum business unit. This is non-core. You can see the moly price cycle on the top left. I think we're really looking for a sort of mid-teen moly price environment, which will hopefully present a window of opportunity where we can look to rationalize this business unit in terms of daylighting and surfacing additional value. Then my last slide on 24, where I'd wrap it up. It's really just a repeat of my opening slide that, again, I'm excited about this year. I think this is going to be a year of strengthening fundamentals for our business. We're not building anything. We're really just looking to execute at Öksüt in Turkey and demonstrate the whole proof-of-concept there. And if we can showcase 3 operating assets with growing levels of positive free cash flow and profitability, that's going to really present well on our balance sheet. And I think as we bring that to fruition, I would like to think that's going to put us in good stead for growing valuation multiples, and that will serve our shareholders well. So with that, Mike, that kind of concludes my prepared remarks, and I'll hand it over to you, sir.

So thank you very much for the comprehensive overview.

And typically, I've got a bunch of questions. I don't see any on the line yet. Feel free, people, if you want -- or listeners, if you want to send one in. I guess, Scott, just -- I certainly heard the number $77 million a lot. And so my question is, you're moving out of heavy capital spending. Well, Öksüt wasn't that heavy, was it, and low capital cost mine. What are you going to do with all those free cash flow? Obviously, you're paying a dividend now, but there's -- certainly, there's a lot of capital allocation opportunities for you all of a sudden, just wondering.

Yes, there is, Mike. And we've been discussing that a lot with our major shareholders, and what we've been kind of -- in those discussions, what we've been putting forward is, first and foremost, we want to eliminate all debt from our balance sheet. And if you look at our profile over the last 6 months, we have been very aggressive in doing that. I want to be in a position, hopefully, by sort of the summer of this year where we just have no debt on the balance sheet, so essentially a pristine balance sheet. And I'd then like to continue demonstrating that positive free cash flow and just build out a peer-leading sort of cash reserves on the balance sheet, and so that will get us to year-end. As you mentioned, we are currently paying a meaningful dividend. But if we can deliver on this year's business plan, and I think it will make for a good, further good conversations with our shareholders in terms of additional shareholder-friendly initiatives. But right now, we just want to focus on executing and see if we can create that high-class problem.

Okay. Certainly, it's been a discussion point at the conference. You maintained your guidance for this year. Maybe, if -- Mount Milligan had some COVID issues, maybe you could just mention how you got over those. And how you're supporting our employees and local communities in this pandemic.

Yes. So when we're in the midst of the pandemic, there's a lot of uncertainty. And I think all of us -- all industries are doing everything they could to support the cause. So what we did on a voluntary sort of trial basis in Mount Milligan was we did downsize our working complement for essentially a 2-week period, and how we did that was we effectively suspended open pit mining, continued to operate the mill in terms of treating stockpile material, but that allowed us to reduce the workforce by more than 50%, so more than half. We then, subsequent to that decision, we actually said, okay, let's take the mill down and accelerate or bring forward the scheduled SAG mill reline. So we did all of that work during this kind of 2-week period, and that kind of finished in the fourth week of April. And since then, we've been operating at full capacity. It's a similar strategy at Öksüt as well. In the first 14 days of April, we downsized the manpower complement. Again, we suspended open pit mining but continued to stack material on the heap leach, continued to irrigate, continued to leach. And then I think, as on, I think it was March 14 -- sorry, April 14, we've been operating at full capacity at Öksüt. At Kumtor, we've had no impact. We've been pretty much operating at full capacity for the year-to-date period.

Okay. And no issues with the local communities? Everything is fine?

No. They're all supportive. I mean all of our businesses, we have a good social license. At Mount Milligan in British Columbia, I think one of the more important stakeholders -- obviously, the community and the government, but one of the more important stakeholders is our First Nation relationships. I think we have 12% of our workforce is First Nations. There was initially some concern that the First Nation chiefs, they didn't want to see employees potentially being exposed to the virus and then bringing it back into the First Nation camps or reservations, but we've since been in very active dialogue, and that concern has been alleviated.

Okay. That's good. I guess going to the Kumtor technical report, that's -- obviously, it sounds like a very positive news. How much of the resource you think could convert to reserves? And what would that mean for the mine life? I know the -- this technical report is still being drawn up.

Yes. So there's a lot of measured, indicated resource inventory there. If you look at -- at the end of last year, Kumtor had up to sort of 7 years in terms of remaining reserve life. My aspiration, Mike, is I'm hopeful that this study will allow us to showcase a 10-year reserve asset life, I think that would be a fantastic development. But as you mentioned, let the engineers do their work and let them finalize and compile the study, but that's kind of my aspiration.

So -- okay. Thank you. So this would be all for open pits because I know Kumtor has deep roots with mineralization. I'm just wondering, is there any plan to ever go underground at Kumtor?

Yes. I mean you're right to bring that up. There is -- there could be significant underground potential at Kumtor. If you look at our inferred resources at -- underground ounces, sorry, we've got in excess of 3 million ounces of plus 7-gram inferred underground resources. Right now, though, the focus is on our surface opportunity. So in terms of open pit extensions and targets, if I look at the budget for this year, again, it's a significant budget. Again, we're reinvesting another $20 million this year in drilling. It's exclusively focused on the open pit opportunity. So it's a great problem to have, because even this year, we'll finalize that life-of-mine report, but there's going to be a whole swath of information coming from this year's drilling program that we can incorporate into future studies and what have you. But -- we definitely recognize the underground as a future opportunity, but right now, we're focused on the open pit.

Okay. We're just down to the last minute, but one last question from me. Actually, I think there's one online. And yes, there's one investor call -- question. Greenstone. What would cause the company to move forward with the Greenstone project? Is there a gold price that'll allow them to hit their target IRRs? So you have about 1 minute or so for that question, Scott.

Yes. So as I mentioned earlier, we used a gold price assumption of $1,250 when we did the feasibility study. And you saw the result and rate of return was around 14%. We tend to be quite disciplined in that we want to make sure our assets are profitable in a lower gold price cycle, so I'm certainly cognizant that we're in a much higher gold price environment, and it looks like it might be sustainable. But -- so now when we do our strategizing and what have you, we continue to use sort of $1,250 to $1,300 sort of gold price. So really, the true answer to your question is, we wouldn't let the gold price dictate the economics. We wouldn't make a construction decision just because all of a sudden we're in a plus $1,500 gold price environment. We want to see that there's an incorporated margin in this project such that even if you find yourself in a low cycle, i.e., $1,250 relative to today's price, that the asset still is justified in terms of the value proposition.

Okay. Well, thank you for that, and we're out of time. So Scott, thank you, and Centerra Gold for participating in this virtual conference, and we're hoping are live in Barcelona, May 18-20, 2021. And more importantly, I hope your family, yourself and all your employees are all safe. Thank you.

Thanks, Mike. Appreciate it.