Kinross Gold Corporation (K) Earnings Call Transcript & Summary

Welcome to the Kinross Gold call. My name is Luke, and I will be your operator. [Operator Instructions] I'll now turn the call over to Catherine McLeod-Seltzer. Please begin.

Good morning, ladies and gentlemen, and apologies for the technical delay this morning. My name is Catherine McLeod-Seltzer, and I am the Chair of your Board of Directors. It is my pleasure to welcome you to the 2020 Annual and Special Meeting of the Shareholders of Kinross Gold Corporation. We are in the midst of truly unprecedented and extraordinary times. This year, the Board and management decided to hold a virtual meeting of shareholders due to the COVID-19 pandemic. This prudent approach prioritizes the health and safety of our shareholders and employees and is in line with our value of putting people first. We thank you for attending the meeting as we strive to provide the same level of disclosure, transparency and participation as our physical meetings. I would like to note that Kinross is permitted to hold a virtual meeting of its shareholders, both under the Ontario Business Corporations Act and through our bylaws. Voting on items of business to be considered at the meeting has been open from 9:45 a.m. and polls will remain open until the formal business of the meeting is completed, at which time, I will declare the polling closed on all items of business. I will also pause briefly for you to vote as we go through the items of business today. Shareholders may submit questions for the Board or management through the question box on the virtual meeting page. The moderator will relay the questions as they will be addressed after the CEO presentation. Joining me electronically this morning are the other Director nominees. Paul Rollinson, President and CEO of the company; members of the senior leadership team of Kinross; and Kathleen Grandy, the Corporate Secretary of Kinross. Also joining us electronically is Mr. Lee Hodgkinson, partner at KPMG, the company's auditors. Recording of this meeting will be available on Kinross' website and on the -- this meeting portal after the meeting. Pursuant to the bylaws, I as Chair of the corporation, will chair the meeting, and I appoint Kathleen Grandy, Corporate Secretary of the corporation as secretary of the meeting. I further appoint Broadridge Investor Communications Corporation through its representatives, Jeri Trotter and Alicia Mohammed to act as scrutineers. The notice calling this meeting of shareholders was mailed on April 3, 2020, to all the shareholders of record on March 11, 2020. The secretary will attach to the minutes of this meeting the declaration of Broadridge Investor Communications Corporation, confirming the mailing of the notice of meeting. The scrutineers have submitted their preliminary report on attendance, and it shows that holders of more than 909,260,225 common shares representing approximately 72.32% of the outstanding common shares are represented at today's meeting. As a result, we have a quorum for the meeting. In order to expedite the formal part of the meeting, I have asked Paul Fitchett and Kathleen Jackson Allamby, both shareholders of the corporation to move and second each motion. Notice having been given in accordance with the bylaws and a quorum being present, I declare that this meeting is duly constituted for the transaction of business. The minutes of the previous annual meeting of Kinross held on May 8, 2019, may be requested by contacting the Corporate Secretary of the corporation. Prior to commencing our items of business, I would like to report that the consolidated financial statements for the fiscal year ending December 31, 2019, including the balance sheet and accompanying statements, which, together with the auditor's report, are all contained in the annual report made available to shareholders. Printed copies of the annual report may be requested by contacting the Corporate Secretary of the corporation. The first item of business is the election of 10 directors to hold office until the next annual meeting of shareholders or until their successors are elected or appointed. At this time, I would like to take the opportunity to name the other director nominees who are present on this call, Glenn Ives and Elizabeth McGregor. Glen and Elisabeth are for the first time being proposed for election by the shareholders. We also have Ian Atkinson, John Brough, Kerry Dyte, Ave Lethbridge, Kelly Osborne, Paul Rollinson and David Scott joining us. I will now request the nomination for the 10 nominees named in the management information circular for today's meeting.

I nominate the 10 nominees named in the management information circular for election to the Board of Directors of the corporation.

type="E" /> I second the director nomination.

If you have not already done so, you may now vote for the election of directors. [Voting]

As the number of nominees is equal to the number of directors required to be elected, I now declare Ian Atkinson, John Brough, Kerry Dyte, Glenn Ives, Ave Lethbridge, Elizabeth McGregor, Catherine McLeod-Seltzer, Kelly Osborne, Paul Rollinson, and David Scott, elected as directors of the corporation to hold office until the next annual meeting of shareholders or until their successors are duly elected or appointed. The next item of business is the appointment of KPMG LLP to serve as auditors of the corporation until the next annual meeting of shareholders and authorizing the directors to fix the auditor's remuneration. May I have a motion to approve and second such appointment?

I so move.

type="E" /> I second the motion.

The motion has been moved and seconded. If you have not already done so, you may now vote your shares for the election of auditors. [Voting]

The next item of business is a special resolution approving a reduction up to the stated capital of the company as more fully described in the management information circular. May I have a motion to approve such resolution?

I so move.

type="E" /> I second the motion.

The motion has been moved and seconded. If you have not already done so, you may now vote your shares for the reduction of stated capital. [Voting]

The last item of business is an advisory resolution respecting Kinross' approach to executive compensation. Details of Kinross' approach to the compensation of its executives and the text of the proposed advisory resolution are included in the management information circular. May I have a motion to approve such resolution?

I so move.

type="E" /> I second the motion.

The motion has been moved and seconded. If you have not already done so, you may now vote your shares on the advisory resolution with respect to executive compensation. [Voting]

I now declare the voting closed on all items of business. The scrutineers have completed their preliminary count of the votes cast and have reported the results, and I declare that all motions have passed. A report on all matters voted on at this meeting will be filed on SEDAR. This concludes the formal business of the meeting. I will now turn the meeting over to Mr. Paul Rollinson, President and CEO of the company.

Thank you, Catherine. And thank you to everyone for taking the time to join us on our first ever virtual AGM. Before I get started, let me call your attention to our cautionary statement on forward-looking information. I would also remind shareholders that they may submit questions and we'll take some time at the end to -- at the end of my remarks to answer them. I'd like to begin by introducing members of our senior leadership team. All of whom are on the call. Geoff Gold, Executive Vice President, Chief Legal Officer; Andrea Freeborough, Senior Vice President and Chief Financial Officer; and Paul Tomory, Executive Vice President and Chief Technical Officer. I'd also like to welcome our employees who have joined us today. I remain inspired by the dedication and resiliency of our people, which is underscored by their sustained response to the challenges of the current pandemic. Despite global uncertainty, changes to worker teams and new protocols, our employees have continued to deliver on our core commitments to health and safety, environment, social and governance, or ESG, operational excellence and financial discipline. Thanks to their ongoing efforts, we have mitigated the impacts of the pandemic to our portfolio, delivered a strong first quarter and remain well positioned for success over the longer term. We're meeting today under difficult and unprecedented circumstances and at a time of uncertainty for our families, our communities and our economy. Our thoughts are with all of those who have been impacted by this pandemic and with our health care providers and frontline workers, who continue to put themselves at personal risk in order to help out. I'll begin my remarks today by discussing Kinross' response to the pandemic, including what we have done to protect our people, our communities and our business, where we are now, including a look at the Q1 results we announced yesterday and why we believe we're positioned to weather the pandemic going forward. I'll then review some key highlights from our excellent performance last year, which we believe helps to provide a strong foundation for our future. And finally, I will conclude with a discussion of some key positive trends we see for Kinross' future. So let's start by looking at our response to COVID-19. What we've done, where we are now and how things look going forward. From the outset, our response is being driven by our first priority, ensuring the health and safety of our employees and the communities where we operate. That priority is embedded in our culture and has made Kinross one of the industry's safest operators for many years. As early as late January, we had established a cross-functional task force to coordinate our global operational response. As a result, and well before COVID was deemed to pandemic, we had contingency plans in place to mitigate potential impacts. Working in cooperation with our host governments, local health authorities and expert medical and travel advisers, we rapidly developed and launched a comprehensive range of practices and protocols to protect our workforce and communities across our global business. Our employees have been exceptionally conscientious and disciplined in implementing and following these protocols at all of our sites. I would like to now show a video that gives you a sense of the many measures that we have put in place. [Presentation]

Okay. At the same time as we have been working to safeguard our people and our communities, we have also been protecting our business. Thanks to the protocols in place at every operation, all of our mines continue to operate and were not materially impacted in the first quarter. However, operations may be challenged over time given the future global impacts of a prolonged crisis. Yesterday, we were pleased to report strong results for the first quarter. We produced approximately 567,000 gold equivalent ounces at a cost of sales of $754 per ounce and an all-in sustaining cost of $993 per ounce. While we had prudently withdrawn our 2020 guidance due to global economic uncertainty, our Q1 cost of sales and all-in sustaining costs were in line with the annual guidance that we provided previously. Adjusted operating cash flow was approximately $420 million, a year-over-year increase of 81%. Margins increased by 33% year-over-year to $827 per ounce, outpacing a 21% increase in the average realized gold price. Adjusted net earnings increased by 53% to $127 million or $0.10 per share compared with Q1 2019. And while our operations performed well, Tasiast continued to outperform with its second consecutive quarter of record production. Looking ahead, in the coming months, it's very difficult to forecast with any certainty what the impact of the pandemic will be in the countries where we operate. However, Kinross remains well positioned to continue weathering the crisis for several key reasons. First, we have excellent relationships with our host governments. Government support for our business, combined with their responses to the pandemic, have allowed us to continue operating across our portfolio. In several of our operating jurisdictions, mining has been declared an essential business. And in all our jurisdictions, we are working in close cooperation with government officials to keep our mines running safely, given their importance to the local economy. We are also supporting our host governments and communities in their fight against this pandemic. As you would have seen in the video, to date, we have committed over $5 million in direct COVID-related support to our host governments and communities. Second, we are in a strong financial position. As of March 31, we have more than $1.1 billion in cash and cash equivalents and approximately $1.9 billion in liquidity. At spot gold, FX and oil prices, our margins and cash flow are very strong. During the quarter, we generated approximately $110 million of free cash flow and our run rate in April was noticeably stronger than in Q1. To elaborate, if gold prices for the remainder of the year averaged around $1,700 per ounce, we could generate free cash flow in excess of $700 million. As a precautionary measure, we drew down $750 million from our $1.5 billion revolving credit facility, which we do not currently plan to deploy, given our strong operating and financial position. In April, we received an additional $200 million in funds as an initial drawdown on our Tasiast project financing facility. And finally, some of the incremental cost of the pandemic have been partially offset by favorable fuel prices and foreign exchange rates. Third, our operations remain exceptionally strong. As noted, we had good production from our operations in Q1. We have business continuity plans in place to protect and mitigate supply chain risks, including increasing stock levels of critical items at all sites. Of note, at Kupol, one of our strongest cash flow contributors, which relies on the use of winter ice roads, we are fully supplied for the next 12 months. And regarding metal sales, we also have contingency plans to help ensure sustained access to global refining capacity. In summary, on COVID, we will continue to focus on safely meeting our 2020 operational targets and closely monitor the impact of the pandemic on our business. Let's now take a look at our achievements last year, which strongly underpin our confidence in Kinross' success going forward. Kinross outperformed in 2019. We produced approximately 2.5 million gold equivalent ounces at an average cost of sales of $706 per ounce, which was at the low end of our guidance and $28 per ounce lower than the previous year. Our margins increased more than the gold price with an increase of 28% versus a 10% increase in the average price of bullion. Our adjusted operating cash flow increased by 37% to more than $1.2 billion, and our adjusted net earnings more than tripled from $128 million to $423 million. 2019 marked the eighth consecutive year that we have met or exceeded our guidance on production, costs and capital. This accomplishment is shared by a few companies in our sector and speaks to our reliability in achieving consistent results. Our 3 biggest mines, Paracatu, Tasiast and Kupol were key drivers of our production and cash flow, and we expect that to continue going forward. In 2019, these 3 mines accounted for more than 60% of total production and also had the lowest unit cost. Tasiast had record production and cost as it benefited from a full year of production from the completed Phase One expansion. Also in the fourth quarter, we made good progress at our capital-efficient 24k expansion project. The 24k project is expected to build on the success of Phase One and further boost production, reduce cost and increase cash flow. At Paracatu, we also had record production. And we have increased our forecast for annual production while maintaining a long mine life, which is expected to extend to 2031. Looking ahead, we see a promising future for both of these cornerstone assets. Turning to Russia. Kupol-Dvoinoye was again the lowest cost operation in our portfolio, and we expect Russia will continue to be an important contributor going forward. Interestingly, we have extended Kupol's mine life by 8 years from its original plans due to our continued success, adding resources through exploration at the same time as we mine. Last year, we added over 400,000 ounces to reserves, one of our largest additions to date, extending Kupol's mine life to 2024. Our acquisition of Chulbatkan marks the latest chapter in our 26-year history in Russia. Chulbatkan has a compelling base case as a relatively high grade, near surface, heap leachable deposit with an initial resource estimate of nearly 4 million ounces and mineralization open in many directions. We are carrying out extensive drilling at Chulbatkan this year, and we look forward to reporting on the results. We also advanced our development portfolio in the U.S., completing the Round Mountain Phase W project in Nevada and advancing the Fort Knox Gilmore project in Alaska, which is expected to extend mine life to 2027 and 2030, respectively. This past February, we also announced plans to return to active operation in Chile with the restart of La Coipa -- of the La Coipa mine with the Phase 7 deposit. Phase 7 has an attractive estimated IRR of 42% at a gold price of $1,500. The project is expected to add ounces to our production profile starting in mid-2022. And looking back at 2019, we are pleased by our achievements and excited by the strong future that we believe our operations will deliver. Let's now turn to some of the positive trends we see as we look ahead to the future. Although COVID had no material impact on our operations during the first quarter, we made the prudent decision in April to withdraw our guidance, given the pandemic's prolonged and uncertain effects on the global economy. Nonetheless, our teams continue to work very hard, and I'm hopeful that we can still achieve those results. Looking further ahead, the longer-term outlook that we provided in February continues to give a useful indication of the positive general trends we see for Kinross going forward. Though the timing and details may be subject to change due to the continued impact of the pandemic. To recap, we stated that we expect production to remain strong around the 2.5 million ounce level in '21 and '22. We also noted that in terms of capital spending and costs, we have nearly completed a major phase of investment in future production. As a result, we expect to see a reduction in capital spending this year and further reductions in 2021 and 2022. We would expect that this reduction in capital spending would result in a corresponding reduction in our all-in sustaining costs. At spot commodity prices and currencies, this combination of strong production, lower capital spending and lower ASIC is expected to drive stronger free cash flow. To put these trends into perspective, it's important to consider what we've accomplished to date in several critical areas of our business. Our consistent and successful history of achieving production and cost targets while operating in diverse jurisdictions provides good context. First, over the past 8 years, we have a proven track record of extending mine life and adding reserves across our portfolio while maintaining production at the 2.5 million ounce level. Going forward, with our large resource inventory and exciting exploration targets, we are strongly positioned to continue extending mine life and maintaining production at the 2.5 million ounce level. Second, over that same 8-year period, our ASIC has gone down by approximately $100 per ounce. And as I just noted, over the next several years, we expect ASIC to decrease further, increasing our potential for strong free cash flow. And finally, we have a long history of successful operations in all of our regions and mutually beneficial working relationships with our host countries and communities. We are confident those strong working relationships will continue given our strong commitment to ESG priorities wherever we operate. To sum up, we believe Kinross' success will continue to be based on our impressive 8-year track record of delivering operating results and our core strengths, which include: large annual gold production with margins that are trending higher, a robust balance sheet and financial flexibility, a proven record of success in project execution and extending mine life at our operations, a high-quality pipeline of low-risk projects, strong relationships with our host governments and communities, and an impressive record of on the ground performance in ESG. We believe these strengths add up to a strong outlook for our future and a compelling value opportunity for shareholders. To conclude, our core principles of responsible mining, operational excellence and financial discipline have been key to mitigating the impact of this pandemic for Kinross. Those principles will continue to provide a strong foundation as we work through the current challenges and into the exciting future that lies ahead. And finally, I want to, again, thank our employees for all their hard work, our host governments and communities for their partnership and cooperation and our shareholders for their continued support. Now with that, operator, I think we're going to try to see if we've got some questions. And bear with me, while I just log back in. Okay, Louie.

Our first question is from -- are you able to operate your mine during the pandemic via your protective equipment?

Yes. I -- and as I alluded to in my script, we have operated and continue to be able to operate during this pandemic. And I think, again, that's a lot to do with our preparedness. And we really got in front of this situation. And certainly, as it relates to adequate PPE, we've prioritized that as our first priority is the safety of our people. And we believe we have all adequate PP&E (sic) [ PPE ] at our sites to continue to operate safely.

Thank you. Our second and final question from our shareholders is, are you eligible for any government programs?

Yes. Well, we certainly, look where -- there are certain instances where we have been able to get government support, probably most notably in the U.S. where we've benefited from the AMT system that was set up as well as the U.S. CARES Act. And those have been fairly significant. We highlighted the benefit of those amounts, those dollar amounts that we received on our quarterly call this morning. But just to recap, we do expect we'll have an acceleration of about $33 million of AMT refunds this year. There's an additional $60 million of AMT refund that we also expect to be received over sometime over the next 12 months. So yes, we are certainly, in each jurisdiction, looking where we can to access government support.

Thank you. There are no more questions at this time.

Thanks, Louie. Well, listen, I'll close out here this morning. I want to just thank everyone again for joining today's meeting. And please keep you and your -- please keep safe, and we look forward to catching up with you in the future. Thank you, everyone.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect. Have a great rest of the day.