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

Greetings, and welcome to the Centerra Gold Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded Tuesday, May 18, 2021. It is now my pleasure to turn the conference over to John Pearson, Vice President, Investor Relations. Please go ahead.

Thank you, operator, and thanks, everyone, for joining our call today. Today's call is open to all members of the investment community and media in listen-only mode. Following the formal remarks, the operator will give the instructions for asking a question, and then we will open the phone line to questions. Joining me on the call today is Scott Perry, President and Chief Executive Officer; Darren Millman, Chief Financial Officer; and Dan Desjardins, our Chief Operating Officer. I would like to caution everyone that certain statements made today may be forward-looking statements and as such, are subject to known and unknown risks, which may cause our actual results to differ from those expressed or implied. Please refer to the caution regarding forward-looking information in our news releases and our other filings, which can be found on SEDAR, EDGAR and on the company's website at centerragold.com. And now I'll turn the call over to Scott.

Okay. Thank you, John, and good day to everyone. And thanks for dialing in for our conference call update. Look, there's been several developments in the Kyrgyz Republic since we last spoke with you all during our Q1 earnings conference call. And again, obviously, our self, management, all of our shareholders were all very keenly following these developments. And just in the spirit of transparency and keeping everyone fully informed and up to date, we thought it would be appropriate just to have a quick conference call just to talk about some of these developments and then obviously, happy to take any questions when we move into the Q&A portion, but really want everyone to be totally up to speed on the actions that we have taken to protect the interest of the corporation as well as our shareholders. So over the weekend, you would have seen one of the press releases that we released, just advising everyone that we have now initiated binding arbitration against the Government of Kyrgyzstan, the purpose here, Centerra, we're seeking to enjoin the government from taking further steps to implement the recently adopted legislation or to pursue recently imposed fines as well as reasserted tax claims against Kumtor Gold Company. All of these, all of which, violate the government's investment agreements with respect to the Kumtor Mine. And we also intend to hold the government accountable in the arbitration for any and all losses and damage that result from its recent actions against Kumtor Gold Company and the Kumtor Mine, if no resolution is reached. Then most recently, overnight, yesterday evening, we issued another press release informing the market that we had now taken action to block any sale of the shares held by Kyrgyzaltyn. This is obviously an important development in terms of protecting the right of the organization and our shareholders. And as we said in our press release, I want to reiterate, we will not be in a position to comment any further beyond what we actually disclosed yesterday in that press release. With regards to the mine and particularly the situation at the mine as of the weekend as well as yesterday, yesterday in Kyrgyzstan, the Kyrgyz Parliament, they did pass a resolution to impose the law of the external management. So as we speak right now, to the best of our knowledge, Kumtor is being controlled and operated by an external manager. Over the weekend, that was effectively when the Kyrgyz Government seized control of the Kumtor Mine. They did this by sending government authorities to the mine, by sending government authorities to Kumtor's office in Bishkek as well as sending government authorities to the homes of several key Kumtor Gold Company employees. Consequently, as a result of these activities, Centerra is no longer in control of the Kumtor Mine and can no longer ensure the safety of the mine's employees or its operations. Shortly before the government took control, all key safety, monitoring and operational systems at the mine were functioning properly. Centerra did not disable any such systems, and the mine was operating without incident. Due to the government's unprecedented actions, Centerra has now suspended access of all local Kumtor Gold Company employees in the Kyrgyz Republic to Centerra's global IT systems to prevent any unauthorized intrusions into those systems. None of these systems are required to safely operate the mine and the company urges the Kyrgyz Government to take all measures necessary to ensure the safety of Kumtor's employees and the mine as well as to desist from future hostile acts, including document and computer seizures and the intimidation of senior Kumtor Gold Company personnel, who have been subjected to visits by the security services to their homes and threatened with unjustified criminal actions. Last thing I would just like to just mention, you would have seen in our press release disclosure over the weekend and yesterday, that as a result of the fact that we're no longer in control of the mine, we have suspended our guidance for this year as well as our 3-year guidance for the Kumtor Gold Mine itself. The leadership of the Kyrgyz Republic has acted with astonishing speed since the beginning of this year to undermine the basis on which the Kumtor Mine has been operated and has consistently refused to engage with us on any manner it considers to be the subject of dispute. As I mentioned earlier, the government's actions have left Centerra no choice but to exercise all of our legal rights through the pursuit of arbitration and otherwise and to protect the interest of Kumtor Gold Company, Centerra and our shareholders. I would reiterate that in the event that the government wishes to engage in a constructive dialogue, as always, we remain willing and available to do so. With that, that really concludes some of my prepared remarks, but I would now like to pass the call back to our operator so that we can move into the Q&A portion, please.

[Operator Instructions] The first question comes from Anita Soni of CIBC.

Firstly, let me just express my sympathies on such an unfortunate situation and support for the Centerra team. Secondly, I guess, in your opening comments, you said you won't be commenting further on that -- on legal matters. But I'm -- I guess, let me phrase it in a different way. If someone is presented with shares that are from Kyrgyzaltyn, would they -- what do traders would be doing at this point with the block of shares that the Kyrgyz Government is trying to sell? They did file for that.

I apologize, Anita, you broke up there. Just the second part of your question, sorry.

Yes. The second part of my question is the Kyrgyz Government did file that they had a block of shares that they wanted to sell. So I'm just wondering what is the -- like what -- how should people proceed if they want to -- if they're presented with these shares as they -- people are trying to buy or sell these shares. Like I'm trying to understand the actual effectiveness and legal ramifications of the statement that you made that the Kyrgyz are not allowed to transfer their shares.

Yes. Anita, all I can do is refer you to the press release of last night, where we have taken action to block any sale of shares held by Kyrgyz holders. I can't go beyond any of those details.

Okay. Great. And then the second question would be in terms of your expats that are in the country at this stage, are they -- are there any plans to relocate them at this point? And could you -- I know it's extremely early, but give us an idea of any potential costs associated around that?

Kyrgyzstan has been dealing with the COVID-19 pandemic, just like we all have, and they have been going through a third wave, most recently, not dissimilar to what we're experiencing here in Canada. So globally, we've been encouraging all of our employees, as and where possible, they should be looking to work remotely. And so when it comes to Kumtor and our most senior expats, they've heeded this advice, and they have been working remotely. And most recently, they've been actually working from their original jurisdictions outside of Kyrgyzstan. So I'm not seeing any impact there in terms of a need to rotate out expats. And the last aspect of your question with regards to cost, I would put forward, that is negligible.

The next question comes from Trevor Turnbull of Scotiabank.

In your press release, you mentioned that, essentially, you have rights under the 2009 shareholder agreement. And there is a copy of the shareholder agreement on SEDAR from back in 2009. I just wondered if that is kind of the most up-to-date and if that's a reliable document for us to take a look at.

Yes, Trevor, absolutely correct. That is the 2009 investment agreement. And that document that you download or pull down from SEDAR is an up-to-date correct version. So yes, you can rely on that.

Okay. And then, I guess, I did go through it and did my best as a nonlegal person to try and make sense of it. There was language in there with respect to a political risk incident and what you called -- I think at the language, it was referred to as a risk rights. Can you talk at all about what -- how that works? It was a bit opaque, trying to read through it. But it sounded to me as if there is a political risk incident, which results in, say, a political risk claim that you -- Centerra could then do a rights offering. I guess I have 2 questions. One, could you maybe talk a little bit about that? And two, I assume you have political risk insurance or that clause wouldn't exist?

Trevor, thanks for your question. I'm sorry to frustrate you, but look, we've certainly taken action to block any seller shares held by Kyrgyz holders, but we are not in a position to comment beyond what was in that press release from last night.

Okay. And again, I'm not trying to belabor the point, but can you even say whether -- or in the past, have you had -- is political risk insurance something that Centerra's had?

Trevor, again, I'm not in a position to comment beyond what was in that press release from last night. I've got strict guidance, and I need to be following on that.

Okay. Then one last question then, just kind of thinking back to March 18, when you guys talked about the first tax claims that were coming forward from the government. Just out of curiosity, I mean, did that come out of left field to a certain degree? Or had you had a sense that things were kind of bubbling away and that potentially, there was going to be claims and [ working ] their way out from the government? Or did this all kind of start back then completely out of left field?

Trevor, I would use your analogy that it was from out of left field on -- it would have been the evening of -- from memory, it was the evening of March 17, Kyrgyz time, whereby we were notified that the Kyrgyz State Tax Services office had done a sudden reversal of their previous position on those matters. And again, I'm going by recollection here, Trevor, but some of those tax audits and tax positions, we had resolved those in prior years, 2016, 2017, from recollection. And so much so, that the Kyrgyz State Tax Services office had actually withdrawn their audits or terminated any claims and the matter was resolved. And then you come to March 18, and all of a sudden, we were notified that they had done a sudden reversal of all of that. And by doing that sudden reversal, they effectively had reactivated those tax audits or those tax positions that they were taking. So that was from out of left field. But again, you may recall, we disclosed that immediately to the market because we wanted to be fully transparent, if you will, with the investment community and just kind of make sure that people were aware that we were seeing that the political temperature in-country could be elevating somewhat.

Right. Okay. I understand. And certainly, good luck to you guys and certainly, the people most affected who potentially are on the ground there and dealing with a lot of uncertainty. So good luck to you and your team. And that's all I had.

The next question comes from Michael Siperco of RBC.

Can you talk at all about the status quo today at the mine? Obviously, it's a complicated situation, but have all payments been stopped, contracts with suppliers, et cetera? And can you give any color on cash assets, bank accounts in Kyrgyzstan? And maybe related to that as well, is there any other insurance consideration from a business continuity perspective or anything along those lines that we should be thinking about?

Yes, hi, Mike. Look, to the best of our knowledge, I believe the mine is still operating. Obviously, our thoughts of support go out to all of our colleagues in Kyrgyzstan in terms of our employees and contractors. I mean this situation, as Trevor referenced, high uncertainty right now. And I can only imagine the impact that's having on morale and general sentiment. So definitely sending a strong force of support to all our employees and contractors. In terms of some of the other aspects in your question, in terms of cash, we finished the quarter with USD 823 million in cash, and an inordinate amount of that cash, as much as 99%, let's say, is outside of Kyrgyzstan. So in terms of the cash balances that are within the subsidiary of Kumtor or dollars sold in Kyrgyzstan, it's very minimal. To the best of my knowledge, there hasn't been any change in terms of contracts or any key service relationships, et cetera. We didn't authorize or make any changes in that regard prior to the weekend. In terms of potential insurance remedies for us, no, I don't think, at this stage, Mike, that we have anything, like, say, for example, business interruption insurance, things like that. Those kind of insurance coverages, to the best of my knowledge, would not be applicable.

Okay. And then maybe one follow-up. In terms of -- I mean, to the best of your understanding, you're saying operations are normal. If there was any interruption to mining activities, to stripping activities, can you give any color on what potential longer-term impacts could be to the mine plan or what kind of risks we could see in terms of an interruption in normal operating activities?

Yes. I mean Mike, again, I just want to reiterate that we, Centerra, we are no longer in control of the operation. It's effectively under control of the external manager. So again, when it comes to the mines, operating performance, safety performance, environmental performance, all aspects of operational stewardship, we are no longer in control. But look, in the spirit of your question, prior to these developments, whenever you and I chatted or with other participants in the capital markets, in terms of Kumtor's business plan for this year, the primary focus was the expansion of the pit in an area called cut-back 20. And pretty much, for the majority of this year, it has been -- the mine was scheduled to be exclusively focusing on waste stripping, in order to liberate that area of the pit in terms of accessing ore. So that would be the key focus, I would imagine, even under external management, is continuing to move forward with the mine development plan.

[Operator Instructions] The next question comes from Mike Parkin of National Bank.

With the -- you've kind of stated arbitration proceedings have kicked off. Has that got a time period before international arbitration is officially kind of assigned the date of commencement? Or can you give a bit of color on how that kind of proceeding kind of moves forward?

Yes. Thanks, Mike. Look, Centerra's claims will be adjudicated by a single arbitrator in the proceedings, which will be held in Stockholm in Sweden. And all of this is conducted under the rules of The United Nations Commission on International Trade Law. So the party for the arbitration, they have 28 days during which to agree on an arbitrator, failing which, Centerra will ask the Permanent Court of Arbitration at The Hague to appoint an arbitrator. And as and when that's commenced, we intend to request a rolling on interim injunctions -- injunctive measures as soon as an arbitrator is appointed.

Okay. And then with respect to Kumtor, I guess the accounts payable on like inventories and that kind of thing, that would actually sit with Kumtor Gold Company?

Yes. That's correct, Mike.

Okay. So all kind of payments flow through that entity. And then inventories, in terms of what that mine has in stock, where would it potentially be kind of running out of spare parts or fuel? Do you guys intend to have kind of a 90-day inventory build for most stuff, so that the mine would probably kind of operate as normal for a few months? Or any color where you could -- we could potentially start to see inventory as kind of limited? And if this kind of carries beyond that, you might start to see bigger issues with the mine arise?

Yes. Look, Mike, I can only comment on what was the status as and when we were in control of the operation. So as and when we are in control of the operation, yes, in terms of our sort of key consumables inventory levels, we were typically operating at a 60- to 90-day sort of coverage. That's all I can comment on, Mike.

The next question comes from Fahad Tariq of Crédit Suisse.

Just one quick question for me. You talked about international arbitration. Are there any other channels that are being pursued, for example, involving the Canadian government? I saw one statement by them, but just wondering if that's something that's being explored as well.

Yes. Thanks, Fahad. So the Canadian Embassy and the U.K. Embassy, they did point out that they did publish a joint statement just supporting Centerra and expressing their concern with regards to the situation as well as the foreign investment climate. And then, yesterday, you saw the -- at the national level, the Canadian government, in terms of the Minister for Trade, they put out a statement again, expressing their concern of the situation and foreign investment and what this means to the economic recovery, particularly coming out of the global pandemic in terms of Kyrgyzstan's fundamentals moving forward. So we're seeing good support there from a governmental perspective. We've also been working close -- we've also been in discussions with a lot of the key sort of international financial institutions, ranging from the EBRD through the World Bank, et cetera. And likewise, they've been supportive in terms of messaging through the political leadership and again, just with regards to their concerns and what this means for foreign investments there. They are initiatives that we've been pursuing, just in terms of influential stakeholders who are supportive of our cause.

Okay. And then maybe just a quick follow-up, and I apologize if I missed it, but has anyone from your team directly spoken with the new administration in the Kyrgyz Republic, or is everything through kind of media reports and these kind of letters that you're receiving?

As of yesterday when the external manager was appointed, we have had no communications with that authority.

The next question comes from Trevor Turnbull of Scotiabank.

Yes, Scott, I just wanted to follow up on one of the earlier questions about kind of the mine situation up at Kumtor. A few years ago, there was a work stoppage that was on the order of like 10 days, but it came at a bad time with the spring melt. And I know that when there was the work stoppage, it allowed kind of extra movement to take place on the glacier because no one was attending to it at the time. Is the situation at Kumtor, just from a mine planning perspective, different than it was then? I understand, I assume the glacier's quite a bit further back than it was in those days. But is that a risk if -- and I understand the mine is also operating potentially, but is that a risk that if something is unattended for even a brief period of time, it could lead to big geotech issues?

Yes, thanks for the question, Trevor. Again, as of right here, right now, we are not in control of the operation. So I can't speak for its safety, environmental or operational status. But as of last week, in the context of your question, that would not have been a concern. That's something that we manage very closely. But if anything, more recently, we've been seeing a lot of glacial retreat as opposed to glacial advancement towards the pits. We do have a number of operational measures in place that protect the pit, and we see a good buffer between some of those sort of impoundment protection measures we have in place versus where the face of the glacier is. So there's a good buffer there. And I would not see that being -- as of last week, I would put forward, that was not a high risk.

Yes. Definitely not the same type of situation it was a few years ago when things were a lot closer to the pit, I guess.

Yes, exactly. And then, Trevor, I think it was even more than a few years ago. I think it was before my time. So I'm pretty sure it was a good 6 to 7 years ago.

Yes. No, it was definitely a long time ago. That's all.

At this time, I would like to turn the call back over to our speakers for any closing remarks.

Okay. Well, thank you, operator. And again, thank you, everyone, for dialing into this call. We just wanted to, again, in the spirit of transparency, just be open and provide a forum for everyone to ask any questions they may have, that are lingering just regarding the situation. But I would just ask all of our shareholders, rest assured that we're taking all measures possible to ensure that we're protecting the rights of the organization and the rights of our shareholders. With that, we'll conclude the call. But thank you again very much for your attendance.

This does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Thank you. Have a good day.