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

Hi, everyone, and welcome to Centerra Gold's Investor Webinar. If you receive the invitation and you're joining us today, we've most likely previously met during a conference roadshow or a one-on-one meeting. If you're new to Centerra and haven't met with us before, welcome. Today, we want to give everyone an opportunity to hear our strategy directly from our CEO, Paul Tomory; and our CFO, Ryan Snyder, and provide an opportunity for you to ask questions directly to the management team. We'll start with a short presentation followed by a Q&A session. We've compiled the questions we've received ahead of this call, but there's also an opportunity for you to submit questions today. If you look to the bottom of your screen. You can submit question using the Q&A box, and we will do our best to answer all of the questions, during the time here today. If we can't get to your questions, we will follow up directly after the call. Today's presentation may include forward-looking statements. For information, please refer to the cautionary statement in our presentation and the risk factors outlined in our AIF. I'd now like to pass the call over to Paul, who will walk us through Centerra's self-funded organic growth strategy and an overview of Q2 and what you can expect for the second half of the year. Paul?

Thank you, Lisa, and it's great to see such a robust turnout on this call, and good to be in front of you to talk about the company. The company in a snapshot, we're a mid-tier gold mining company, though we do have strong exposure to copper and to a lesser extent, molybdenum. But our portfolio is principally North America based. And what I'll do is I'll give a quick overview of the portfolio. We have 2 operating assets. Our flagship mine is the Mount Milligan copper gold mine in Northern BC. And then we have Oksut mine in Turkey, which is a gold producer, strong cash flow generator and a reliable operation. We have a very deep development pipeline. We are currently building the new mine in Nevada called Gold Field. It will be a heap leach operation of a similar scale to our mine in Turkey. We are advancing studies on the very large copper gold deposit in British Columbia called Kemess. It will be almost a twin to Mount Milligan, 2 very long-life copper gold mines in British Columbia. And then lastly, we are advancing our molybdenum strategy. Our molybdenum assets are comprised of the Thompson Creek mine in Idaho. We are well on the way to reopening that mine. And also in the United States is the Langeloth Metallurgical Facility, which is a molybdenum roaster or molybdenum processing plant located just outside Pittsburgh. Together, those 2 comprise U.S. moly, and we treat those as a business unit within the company. I'll talk a little bit about molybdenum here. It's a metal use of alloy steel, and it's currently in very high demand. There's a shortage of supply and prices have really traded up. So we see a real differential opportunity here in a strategic critical metal. Nevertheless, the bulk of our production is gold, followed by copper. And right now, molybdenum represents about 10% to 15% of our complete company value. We have a very strong balance sheet. We finished the last quarter at over $450 million of cash, added to our line of credit over $1 billion of liquidity. We have a strong operationally focused management team. We've recently hired a new COO, Kelly Strong, who comes with over 30 years of deep technical and operating experience. And we've got a robust team in place at all of our assets, especially at our development projects as we start to ramp up new production. So the way to look at Centerra is we have operations, which generate cash that can fund our development projects. We won't need to raise money through equity financings or debt financings. We are -- with a strong balance sheet, we are funded to build our projects. I'll talk a little bit later on our -- how we look at our valuation, but we believe that our shares represent a very compelling place to invest our capital. So we've had a very active share buyback program going over the last 2, 3 years. and we've now paid a dividend for coming up on 7 years. In terms of what the year looks like, I'll ask Ryan to talk about how we've guided for the year and results thus far.

Thanks, Paul. And so yes, just a bit of an overview of where we stand on the year. Obviously, everybody can read the public documents or MD&A and our press releases. I would characterize where we are as right on track. We produced 70,000 ounces of gold and 13 million pounds of copper in the second quarter. And if we look at where we're sitting for each asset, Mount Milligan is operating directly in line with our current plans. We did put out a PFS last year with a new mine plan going forward, and we're aligned with that. Mount Milligan is well on track for its production guidance for the year, which is 140,000 to 155,000 ounces of gold and 50 million to 60 million pounds of copper. And as Paul mentioned, it's generating really strong cash flow. So it's made $195 million of free cash flow through the first 6 months of the year, and we expect strong cash flow from Mount Milligan going forward. At Oksut, operation is probably a little bit better than we thought. So we did increase our production guidance for Oksut as part of our Q2 disclosures. Originally, we were looking at 110,000 to 125,000 ounces from Oksut this year. We bumped that up by 10,000 ounces to 120,000 to 135,000 ounces. And that's predicated on really strong performance. Oksut's at 71,000 ounces of production through the first half of the year, really strong grades coming out of the mine, really strong recoveries through the heap leach, and we've optimized some operating practices there, which is resulting in extra production at the mine. So right where we want to be from a production point of view. I would say, we're doing well on costs as well. I know there's a lot of talk and conversation on inflation and cost escalation at other mining companies. Mount Milligan, there is a little bit of inflation on labor and diesel and things like that, but we do hedge diesel at Mount Milligan. And so we're about 40% hedged for diesel cost this year, and the really strong copper production and copper prices are more than outweighing that. And so we're really heading probably towards the lower end of the ASIC range for Mount Milligan through year-to-date at Q2, we were below the bottom end of our range. And so we're holding to our cost profile at Mount Milligan. And similarly at Oksut. Oksut is a small mine. There is inflation in Turkey. It's an inflationary economy. There's always pressure on labor costs there, but really strong production is more than offsetting that. And that increase in the production profile is again pulling our cost profile towards the bottom end of the range for Oksut. The combination of both of those assets, again, produces really strong cash flow. As Paul noted, we're sitting at $451 million of cash at the end of Q2. We do have a $600 million credit facility that's untouched, and we have no debt. So a really, really strong cash position, which has always been a hallmark of Centerra kind of moving forward. The molybdenum business right now is using cash. We continue to invest in the restart of Thompson Creek, spent about $90 million in the first half of the year, and we're guiding in the range of about $200 million for the full year. But we're on the path to restarting that mine. And the plan is to have that restarted and have first production by the middle of 2027. And so soon, this mine will flip from a use of cash to a generator of cash and be another pillar of cash generation for Centerra as we work to bring the other gold and gold copper assets online. In terms of the buybacks, we're very committed to buybacks. As Paul noted, we believe we have a very compelling valuation given where our shares are trading. We bought back 50 million shares in Q2, and the Board has approved up to $200 million of buybacks this year. And really, our strategy here is to continue to shrink the share count, especially if our shares continue to trade at a discounted valuation while developing these assets and really giving people exposure to more of the value in these assets with a lower share count. And I'll speak to that a little bit more in future slides. Paul, I'll pass back to you, but that's a brief summary of Q2. And really the takeaway is we're right on track with where we want to be.

With this slide, I'll do a bit of a deeper dive on each of the assets in the portfolio. But let me begin by saying that some people still associate Centerra with a mine in Kyrgyzstan called Kumtor that the company really was founded on the basis of that mine. Centerra no longer has any association with Kyrgyzstan. That mine was nationalized 4, 5 years ago. And what we have today is, I'd say, the new portfolio compared to what people used to associate Centerra with. What we've done over the course of the last 2, 3 years is taken the assets that were in the portfolio. Many of them were closed mines. They're on care and maintenance. They had unclear future. They are unapproved projects. And what we did is we restudied all of our mines to assess their potential. And fortunately, each of the mines had a substantial metal inventory in the ground, in many cases, with existing process infrastructure. And simply what they needed was a refreshed look, a deeper technical understanding so we come to a path to a longer life or a project to open a mine. So in the case of Mount Milligan, we currently have a reserve that extends out to 2045. A couple of years ago, it was less than half that. We were -- the mine was going to end in the early 2030s. We've done an extensive drilling program. We completed a PFS on the mine's potential about a year ago, and that extended the life to 2045. And that's just the start. There's significant continued mineralization at the site that could lead to mine life extensions well into the 2050s or beyond. But for now, the reserve life is 2045. And as I said, that's copper and gold in a safe jurisdiction in British Columbia. The Oksut mine in Turkey currently has mine life ending in 2029, but we are working on a mine life extension project. We've been public about that, and we anticipate releasing the results of that study with our year-end results in early 2027, and we're optimistic that we'll be able to add some incremental production there. Our third gold asset is Goldfield. We are mid-flight on construction. We recently revised the amount of spend this year, not because we're seeing higher costs, but rather we've been able to spend more quickly and mobilize our contractors efficiently. So that project is proceeding extremely well, and we're expecting first production in about 2 years at Goldfield. That has an initial mine life out to the mid-2030s. But even at Goldfield, we believe there may be exploration potential. Our flagship project is Kemess. As I said earlier, similar to Mount Milligan, copper, gold, we released a PEA at the early part of this year, and that showed like Mount Milligan, a mine life out to the 2040s with lots of exploration potential. The initial study mines out just less than half the total resource. And we thought that a 15- to 70-year starter mine life was something we could begin work on a PFS, and we're active on that PFS, and we intend to release that sometime next year. So Kemess is a large, as I said, copper gold project. It's a past producer. So the mill is in place. There's tailings facilities in place, camp, airstrip, we have a power line. So truly, it's a brownfield expansion, which represents a lower risk profile when compared to similar size, similar scope greenfield projects in remote areas of British Columbia. And so we think that Kemess is a game changer because what it will do is it will turn Centerra into a large-scale gold and copper producer, principally in British Columbia with lots of exploration potential. And then lastly, advancing a little bit of what Ryan talked about, we have $182 million of CapEx left at Thompson Creek, and we'll be up and running in the middle part of next year, and that will give us mine life until the end of the 2030s, after which our intent would be to restart the Endako mine in British Columbia to give us a couple of decades or more of molybdenum production. So this page represents the company on a page. It shows our reserve lives. It shows our CapEx profile for our major projects, Thompson Creek, Goldfield, Kemess. And then it shows where we think that there's significant exploration potential for mine life extension. I should also note that the CapEx for Thompson Creek then Goldfield and Kemess is sequence. So we're not experiencing particularly heavy overlapping CapEx spend. So as Thompson Creek comes online, we'll be into the bulk of the spending on Goldfield. And likewise, when Goldfield comes online, we'll start to ramp up spending at Kemess. So this is a portfolio, as Ryan mentioned, fully funded. We don't need -- we can fund these from cash flow and available liquidity. Speaking of liquidity, Ryan, back to you on how we look at our capital allocation strategy.

Sure. Thanks, Paul. And I'll be brief because we touched on it. On that previous slide, Paul outlined our assets and our development potential. And really, the focus on capital allocation is internal uses. So we think there are strong returns on developing our projects. That's Thompson Creek, Goldfield and Kemess. We think those are high IRR uses of cash. And then beyond that, shareholder returns. We have paid a consistent dividend, as Paul said, for almost 7 years. We're going to continue to pay a dividend. But given where our shares are trading, we also think buying back our shares is an accretive good use of cash. And so that's really the focus. We do hold equity investments in a number of public companies. Some of those are prospect generators. 2 of them are more significant developers, Thesis Gold and Liberty Gold. We own 9.9% of both of those. And we think those are good investments. That equity investment portfolio is worth over $150 million. And so that's been a use of cash. It can be a source of cash if we want to liquidate any of those. But with our cash on hand and our cash generated at our operations, we can easily fund our internal portfolio without going to outside markets. And that really is the plan. Given where our shares are trading, M&A, external acquisitions aren't really a focus for this company because when you layer on acquisition costs, the IRR of doing so doesn't look quite compelling. And again, we don't want to use our shares when we're undervalued. I would say the real strategy, if you step way back, is to develop those assets that Paul outlined and shrink our share count at the same time and thus giving investors greater exposure and greater torque to those underlying assets. We did start our buyback program in late 2022, so earlier than most companies, and we bought back a significant number of shares. We bought back about 12% of our outstanding shares since we started this buyback program, bringing our share count from about 220 million to 195 million, and we're going to continue to buy back at these share prices. So again, trying to give people torque to these assets by reducing the share count going forward. I pass back.

So on the valuation point, this is one of our strong pitches. So this obviously underpins our buyback rationale, but we believe that we are one of the most attractively valued from a discount perspective among our peer group. And let me just give you a rough sense of that. When you look at our market cap less cash or enterprise value, that number is roughly equal to the value of Mount Milligan alone at spot prices. So our one major asset, Mount Milligan, accounts for our entire enterprise value at prices around where they are today. And that means you're getting Kemess, Goldfield, Oksut and the molybdenum business essentially for free. So this is why we are buying back our shares. As Ryan said, we reduced the share count while building NAV. And -- though we have performed very well over the last year, really our re-rate began about a year ago. We believe that there's significant room yet to run as we close that valuation gap. Some people often ask me, why did the stock tread water for so long and then about a year ago, really start to move. And in fact, I think we're, if not the best, we're one of the best performers on a year-to-date basis. I think it's 3 things. Number one, there were questions previously about Mount Milligan's ability to deliver on its guidance and its commitments. We've now had 3 quarters of solid delivery at Mount Milligan against expectations. Ryan talked about how the year is on track. And I think we're starting to build market credibility in our ability to deliver on our operations and our projects. And I should say our projects are on track for public commitments. So that's one. There's a stronger operating track record at our large assets. Number two, molybdenum was sometimes viewed as a strange component in a gold mining company. And in a way, that's true. You don't find many other gold mining companies with molybdenum exposure. But the metal, as I said earlier, has really traded up on the basis of limited supply in the market, but also very strong demand. I'll repeat, molybdenum is used as an alloy metal for steel, makes steel higher performance. And it's used in things like pipeline, nuclear power, wind power, defense, aerospace and increasingly in semiconductors as a replacement for tungsten. So the price of molybdenum has really traded up, and we forecast for 6, 7, 8 years of deficit in the market, underpinning what we think will be a strong price environment. So molybdenum -- the molybdenum assets have swung from being something that had a question mark around it to being a positive differentiator. And I think the last point on the re-rate is we brought clarity to the portfolio. Each of the assets has a future. We've put out robust studies for each of the assets, and there is a plan forward. And that's the building the NAV point and the numerator, while reducing the denominator to drive that NAV per share. And I'll leave you with one more value idea here. We think that in terms of the total amount of resources we have in the ground, we punch above our weight. We have very large resources in the ground, particularly at Mount Milligan and Kemess. These are world-class size ore bodies with decades of potential. And when you look at the chart on the right, EV per resource ounce we're literally the cheapest in the peer group in terms of what it costs you to buy exposure to our gold and copper in the ground. So this is another way of looking at our valuation and how we think we can continue to re-rate forward. So if we go to the last slide here, this is a snapshot of the portfolio. We have -- on the left, we have cash flow production, a very robust cash flow production from both Mount Milligan and Oksut. As I mentioned, we have an optimization study coming out within 6 months here at Oksut. We've got the deep portfolio of development pipelines, Kemess, copper and gold. We've got PFS expected in the middle part of next year. And at Goldfield, as I said, in about 2 years, we expect first production, again, in a very, very attractive jurisdiction in Nevada. And then over on the right, we have our U.S. moly business, which we're branding as such. It's -- we treat it almost as a business unit within the company, and it's called U.S. Moly comprising of Thompson Creek and Langeloth. So that, in a nutshell, is a tour through Centerra, our portfolio and why we think we represent compelling value to our shareholders. And Lisa, with that, we would be happy to take questions.

Thanks, Paul. Yes. So we did get a couple of questions from the audience. So the first 2 are kind of both related to Goldfields. So I'm going to just combine them into one question here. How would you describe your growth ambitions in the Great Basin over the next 2 to 5 years beyond Goldfield? And do you have any initiatives to grow the gold reserves at Goldfield to extend the mine life for the good project?

Yes. So we are very geographically focused. We're focused on BC, and we are focused on the Great Basin with our 2 projects, Idaho and Goldfield. As you've seen, a number of our junior investments that Ryan spoke of are centered in the Great Basin, most notably Liberty Gold. So that area is a focus for the company. And we would -- if the right opportunity presented itself, we would look to do more in that area. On Goldfield itself, it's a very large land package. We have an active exploration program. And the current study that which we're executing against mines out the oxide resource. It doesn't yet include the sulfide resource. We know that there is a potentially significant sulfide resource on the land package in addition to drilling targets on that land package. We also have agreements with a couple of juniors proximal to Goldfield, where we are participating in drilling programs. So in short, the Great Basin is an area of focus to us. We think that there are lots of opportunities for Goldfield sized assets that may not be attractive to larger players, but certainly would be a very good fit within Centerra.

Great. Thanks. And the next question that's come in here is related to Kemess. So what's the update on the Kemess PFS? What -- will it be similar to the PEA? Or will there be any changes? And then can you also speak more broadly to the Toodoggone region and any opportunities for consolidation, speak a little bit to the Thesis investment and then AngloGold coming in as well?

We think Kemess is a great asset. As I said, large-scale copper gold brownfield compared to greenfields, relatively lower risk profile and execution. The PFS essentially is refining the view we had in the PEA. So I mentioned that the PEA contemplated mining at less than half the total resource. We're going to stick to that because it gives us 15 to 17 years of initial mine life with potential beyond that. So the PFS we're using as an opportunity to refine the engineering estimates to advance permitting to advance consultations to get a more robust view of that which we presented the PEA. So the expectation is that the PFS yields a result in line or similar with refined estimates to that which we presented in the PEA, and it is on track for delivery in the middle part of next year. We like the Toodoggone. We like Central BC. We like the government support we're seeing for mining projects in BC, both at the provincial and federal level. This year, BC is experiencing record levels of investment in exploration. And you'll also note that the permitting time lines in BC are becoming more efficient. So for example, earlier this year, we received our Mount Milligan 2035 permits ahead of schedule, and that was a culmination of having been selected among a number of other projects for expedited permitting and the province delivered on that. So BC is becoming increasingly attractive for mining investment. And the Toodoggone region is probably one of the most prospective areas, if not in the world, certainly in North America. Many juniors are drilling there. We like the district. Kemess is, in many ways, the strategic key to the district. We have the infrastructure. We have a nearly 400-kilometer power line that services the region. We have an airstrip. We've expanded our camp. In fact, many people do use our camp as a transit point to the Toodoggone. We've made the equity investments in Thesis. We like what they're doing. We think that there are potential synergies with the Kemess operation. And we certainly like the idea that Anglo got in there. We don't view that as necessarily a bad thing. We just view it as a validation of what is a very attractive district. So we are bullish on BC. We really like what we have at Kemess. We don't need to add more there. I think Kemess is a very large-scale project with significant potential. So we just -- we like British Columbia and we like the Kemess region.