Kinross Gold Corporation (K) Earnings Call Transcript & Summary

So good afternoon and good evening to our listeners overseas. This is Mike Jalonen from Bank of America Securities. Very pleased to have our next company, Kinross Gold. Paul Rollinson, President and CEO, will be making an initial presentation to the slides that are uploaded on the site. And then we'll turn it over to Q&A. I should note that Paul has been CEO and President of Kinross since August of 2012. So Paul, you're getting to your eighth year. And joined Kinross September 2008, has worked in increasingly senior roles. And Paul, there has been a lot of new CEOs at this conference this year, so you're getting into the veteran status; doing a great job and I'll pass it over to you.

Great. Thank you, Mike, and thanks to Bank of America for adapting this event so that we're able to do all this virtually today. And good afternoon, good evening, welcome to everyone that's joining us today. So as Mike said, I'm going to make a brief overview before we get into Q&A on the company, talk about our financial position, and I'll conclude with some highlights on our value proposition. So Kinross is a large gold producer with a diversified portfolio of assets and an excellent operating track record. Our market cap is nearly $9 billion and our shares are highly liquid, trading on average approximately $200 million a day. Last year, we produced approximately 2.5 million ounces of gold from 8 operations in 6 countries around the world. We expect to maintain a production level going forward by adding reserves in mine life from continued success in engineering and exploration. Our mines are a mix of open pit and underground in a variety of climates. More than 50% of our production came from the Americas, namely the U.S. and Brazil, with the balance from Russia, Mauritania, and Ghana. Over 80% of our production comes from 5 key assets in 5 separate regions. With the recent acquisition in Russia and taking into account our track record of exploration success, we are very confident these assets and regions will have mine lives of at least 10 years. Our margins are competitive with all-in sustaining cost below $1,000 per ounce, but we have guided margins will expand as we bring on lower-cost projects going forward. Our objective isn't to necessarily produce as many ounces as possible, but instead to produce the most profitable and high-return ounce as we can. This is achieved by budgeting our mine plants at $1,200 an ounce, our focus on operational excellence, and a culture of continuous improvement. Our culture in being one of the world's 5 largest gold producers helps to attract and retain some of the best human talent globally. Our strong team of technical experts is core to our strategy and has underpinned our ability to lever on our guidance consecutively for the past 8 years. This is an accomplishment that few companies in our sector have achieved. With respect to COVID, we like many companies are facing various pandemic-related challenges across our business. However, through a combination of early planning, disciplined adherence to health and safety protocols support us post governments and communities, to date none of our mines have been materially impacted. However, we are not taking anything for granted and have established business continuity and contingency plans to help us manage a wide range of financial and operational scenarios. Turning now to our financial position, our balance sheet is in excellent shape. As of March 31, we had approximately $1.1 billion of cash, $1.9 billion of total equity. Our net debt to EBITA ratio was 0.9x and all our credit ratings are investment grade. Free cash flow is strong at current gold prices and is expected to increase over the next few years as we grow margins and our CapEx declines. When it comes to allocating this free cash flow, we'll only commit shareholders capital to new investments if they've passed our rigorous assessment on risk and return potential. As our portfolio sits today, there is no pressure for us to do M&A. And the deals we have completed over the past 8 years have been relatively small, while offering attractive returns. Over the past 8 years, we have reviewed numerous opportunities, but only completed a couple of asset acquisitions. These deals were well-timed and leveraged our operating strengths and regional expertise. In summary, we believe our company is best positioned to offer high quality exposure to gold prices. Investors in Kinross benefit from a large liquid equity, a high quality geographically diverse portfolio, proven track record for delivering on promises, excellent balance sheet, and strong and growing free cash flow. Our shares have performed well, but we believe there remains considerable room for further upside. We think Kinross offers a great combination of size, track record, balance sheet strength and growing free cash flow. With that, Mike, I'd conclude my opening remarks and be happy to get into some Q&A.

Thank you, Paul. And just remind listeners, please don't be shy sending any questions, but I have a number of questions also Paul. Certainly under your 8 years running Kinross -- nearly 8 years, August 2020 will be your 8-year anniversary -- there has been a number of key accomplishments. Over the next year or 2 what are the items on your to-do list to get completed to, as you mentioned, a lead to expanding margins, lower-cost projects, moving to other production stage?

Yes, sure, thanks. I mean really I would say I'm very proud of our key accomplishments. We've really built our company around some guiding principles of operational excellence and balance sheet strength and disciplined capital allocation. So that at a very high level is what our playbook is. As well over that 8 years, one of the things I'm proud of, we've really strengthened the balance sheet, paid off $1 billion of debt. And so when I look out sort of 2020 short term, clearly COVID is #1. We're all dealing with how that might be affecting our business, keeping our people safe, and like finding our way through this situation. When I look out a little further than that, I guess I would say, to the extent the current environment continues in terms of what we're seeing in terms of spot, everything whether it's the gold price or currencies or oil prices, as we indicated we're going to have some pretty strong cash flows. And I think that's again where discipline matters and we've got to be very careful and considerate as to what that capital allocation strategy would be.

Just a question on your guidance this year, you mentioned that your mines were only maybe impacted on peripheral basis. Kinross' slow did withdraw guidance, but you still -- on the Q1 call, you said you felt confident about bringing back 2020 guidance intact. Just wondering when Kinross or yourself will be confident to make that reintroduction.

Yes, it's a good question. And I think context again matters here, Mike. I mean this thing has evolved quickly and I think everyone's been uncertain of what's going to be coming. And so we hold our guidance on April 1, which was earlier into the declaration of a global pandemic. And from my point of view, it seems like a lifetime ago from where we are today. So it is a day-by-day thing. And in our case we had a few things going for us, which I'll come back to, but the main reason was more about uncertainty than direct concern or threat to our business. And on the latter, as it relates to our business, part of our internal focus on technical excellence hand in hand is that -- with that, of course, is things like ESG and safety. And what does all that mean? It just means as an organization, we got on to this whole COVID preparation thing pretty early. We had cross functional task force created in late January. And we were really well prepared long before it was declared a global pandemic. So I'm proud of what the team has been able to do in that regard. We also had some good fortune in that -- in a number of our locations. Our mines were declared as essential service, essential business. So we didn't have a regulatory interruption. And even in places where they weren't declared essential, we know that they're vitally important to the local economies and we've had a very cooperative, constructive situation with our local governments and communities. So that's the good side. We pulled the guidance for uncertainty and having said all of that, it's really a question of how long does this pandemic last and the way I think we've referred to it, we call it paper cuts in the system. And where we see frustrations potentially developing will relate to things like expat mobility or expert contractor mobility and travel restrictions. And we've done a pretty good job on the procurement and supply chain. But over time, if people aren't allowed to travel freely after some several months, that's going to start impacting rotations that we have at some of our remote sites. So you would have also seen, as part of all of this, at that same time as we were pulling guidance, we also drew down prudently I believe, just to create a bit more of a cash forecast for uncertainty or disruptions that we might encounter. We drew down about half of our revolver. So I guess from -- this is a long answer to your question. As we move forward here, it is a bit of a week-by-week, month-by-month thing. But I'd suggest that whilst we have that revolver drawn for a bit of security like many companies, we are -- there's a cost to that and clearly as soon as we feel things have calmed down enough in our business, we'll be repaying that revolver. And I think that's a pretty good signal for our investors that when that revolver gets repaid, we're feeling more comfortable about things returning to normal. Our concern about uncertainty is diminished. And I think at that point in time, it's -- that's when we run -- are really start thinking about okay, now what can we say about the balance of the year, whenever that might be. Sorry, a bit of a long answer there.

As you mentioned, there's just a lot of moving parts and uncertainty, isn't there so? That's -- okay, maybe you touched on your M&A strategy, but maybe you can describe it in how you think of targeted returns when investing in new projects and assets. So that would be also organic assets, which ones are moved to the front of the queue for development.

Sure. Yes, look I think again, we've been fortunate that we've had a lot of opportunities to reinvest in our business. And so we haven't felt a lot of pressure. And that was my point about we've really just done the 2 asset deals. As you know, we did the JV around involved back in the days when gold was sub $1,100, always a nerve-wracking time. But we really believed in what we saw and it's turned out to be a great acquisition for us. And then, of course, we announced last summer this little tuck-in in the Far East of Russia, Chulbatkan, which we're really excited about. But, as you also know, a good chunk of what we've been doing over the last 3 years, our capital spend has been higher than the historical run rate, up in and around 1 billion. So we've been reinvesting in our business. I would say typically, a bit off the cup, our normal run rate for us in total capital spend is $750 million to $800 million, of which $400 million plus or minus is sustaining and the rest is discretionary. Well, we're -- this is part of the part about the margin expansion as well as the reduced capital spending. We're just finishing that cycle of investment and projects. And so we're feeling pretty good. And so, again, not a lot of pressure to do M&A. We do look, but we've got a pretty strong technical team and we're pretty rigorous in terms of what meets our threshold. For projects themselves, I think you went there a little bit. We don't have a bright light per se. We do use sensitivities. And let me just give you a flavor. When we looked at something like Phase W at Round Mountain, it is a major capital project; we're spending a lot of money. But in terms of complexity, it's essentially a giant sort of stripping campaign where we're doing a layback to remove waste. There's some infrastructure involved, but it's -- the bulk of it is really with this lay back. And when I think about Downtown Nevada at one of our best run mines where it's no more complicated than waste removal, what I'm saying is we would tolerate a lower IRR. We still want to be into double digits. But on the spectrum, we would be comfortable with that risk return at a site like that. When we're somewhere else like looking at some of the Tasiast expansions or where we are in and say with Chulbatkan, we're going to be targeting much higher double digits. And that's generally how we've come at it. It isn't a one shoe fits all. It's a bit of a horses for courses, what's the nature of the actual spend and risk return we're looking at.

Maybe I could -- one of Australian mid-tiers earlier today talked about their acquisition track record, how their returns have been like on their acquisitions of other mines, like 30% since acquisitioned. Although Round Mountain and Bald Mountain, that was about $600 billion. You benched $1,100 gold. I would assume the returns would be very high now.

It's been fantastic. It's just -- it's more than paid for the whole deal itself and we couldn't be happier. And we've just completed this Phase W campaign. And part of that as well, it's not only that gold price, part of what enabled the Phase W. It was when we got 100%, we could really drive the asset, 100% on our drive the cost structure, the efficiency. So we got to a good IRR on Phase W at a $1,200 environment given what we were able to do operationally. And of course, the gold price has been a bonus. So stay tuned. It's early days, but we actually think there'll be potential beyond Phase W as well. There's a lot of -- there's a lot more gold there and the ore body remains open at depth and is in fact getting higher grade, we think, as we go deeper.

Okay. Maybe COVID segue question, Round Mountain, I've been into the town. It's obviously people -- workers go out to work at the mine. That's got to be kind of a very secluded remote area that you could control very easily for COVID I would assume, right. It's -- I just had the thought of that, just wondering.

Yes, it's a good point because we were joking the other day, there's no more lonely place than being by yourself in a haul truck. It's not like standing beside someone else underground. So, yes, that's a combination of the nature of the operation itself and the protocols we've put in place combined with the fact that these are remote locations. The best examples from a control point of view are certainly at Russia and Tasiast, which are both quite remote. In the case of Kupol, you've got to fly there. And so we've got very rigorous protocols as to who can get to site, quarantine procedures on the way in, and it's very easy for us to control access and minimize risk. And if there's any kind of suspected situation or event, we can jump on it very quickly. Same at Tasiast; very, very tight controls. You can drive to it, but it's not near a town. It's out in the middle of a desert and who gets through the gate can be carefully controlled. And you do get a bit of that certainly at places like Round and certainly Fort Knox as well.

Maybe I should touch on some of the projects. Actually a question just came in. Here we go. What determines the reserve price or off the reserves that Kinross uses? When would you consider increasing the reserve price given where gold is? And what would the impact be of reserve sensitivity?

Yes, it's a good question. We are -- we have been at $1,200, at least since I've been in this role. And it's -- we've got reserve set at $1,200. We had -- we do have some flexibility in terms of how we do our mine planning even where the reserve at $1,200. But I think the bigger picture question that's being asked is, look this is great, spot everything for us right now is very good for our business. But by running our mine plants and doing our reserves at $1,200, we're geared to margin. And so we're going to be very careful. There is no plan of what to run out and repeat some of the potential mistakes in the last cycle where people started dropping cut-off grades and mining lower quality tons of rock. There may be some theoretical cut-out trade-off analysis there as between what do you compromise in margin versus perhaps now or mine life that maybe smaller -- some smaller operations. But our plan would be to -- for the foreseeable future, for the rest of from where we sit today, we'll use $1,200. Now if this continues and $1,700 becomes the new $1,200, there may be some thinking we want to do there. But we're not rushing to change the way we're set up, which is geared for cash flow.

I hope you're aware about our commodity team, have a $3,000 gold price target 18 months from now.

Yes, I know. I understand. I think there is a -- that's a growing chorus and I hope they're all right.

Yes. So it's about the Tasiast Phase One has been a big success for Kinross. You're above the design rate, processing rate of 15,000 tons per day. And you noted on the Q1 call that Tasiast's 24K project is on schedule for 24,000 tons per day by 2023. Just maybe you can give us a roadmap how that -- how the mines are operating above design capacity and of course how the expansion is going, I guess. I don't know if there is still labor disruption at the site, if that's having any impact.

Sure, Mike. Look, I think the Phase One, we couldn't be happier. First of all, we built it on-time on-budget and that's always significant when you've got a major capital project in a less developed country. It's noteworthy. We had a seamless handoff to ops. And the ops guys have really dialed it in and we've been sort of making quarterly records as we keep moving here. And it's all about the mill performance. And it was all about that oversize SAG mill. And what we've basically been doing is we can dial up that oversize SAG mill to greater than the Phase One rated expansion of 12K. And there is no limitation in the saying. And when we do that, what we do is we kind of -- it's like putting high pressure water down the hose. We find out where the stresses are in the system and that's a bit of an indicative guide. And that's how in doing that, just again for context, we realized that we could really, from the 21K, get to the 24K with lower incremental capital by operating it, by running it, and by seeing where the stresses are in the bottlenecks in the system. So we're pretty happy we've got a great crew there. We'll see how we go with the whole COVID situation. We haven't yet seen any kind of material impacts on schedule, but again if this continues, again it comes down to technical expertise and moving people and moving people around, we may start to see some impact. Yes, the strike, I'll comment on that. I have to say I'm disappointed. It's not what I view to be our culture globally. We have a culture globally where we unite in a crisis. And we see this as sadly a very opportunistic attempt by a minority, a small group of union delegates, to try to use this COVID situation to basically get more from us and, in fact, try to reopen items that were agreed in our collective labor agreement recently. So we're not happy, I'm not -- I'm disappointed, but I want to be careful to say this is not everyone. On any given day, there's about 3,000 people at site. About half are employees, half are contractors. And our salaried people are not on strike and the contractors are not on strike. And so when you boil it down -- and of that sort of 1,500 or so employees, they're represented by these delegates. There's 11 of them, 11 of these delegates represent those employees, those unionized employees. And of those 11, it's really 5 in particular that have been pushing. So I'm not happy, but I'm not worried. We're going to be firm. This is not something we approve of. And we've had 4 strikes since we've been operating there now for 10 years; over the last 10 years, we've had 4 strikes. And I -- we'll work through it and I'm confident we'll be able to work through this. And in each of those other 4 instances, we were able to make up any lost ground such that we didn't have an impact within the year. So we just got to be -- I want to be respectful, I want to be fair, but we simply view this as opportunistic and we're not happy.

And just 3 minutes to go. I apologize, I got so many questions I want to ask you. And somebody -- lots of good things happening, but maybe I'll touch on -- I want to ask about the Akoti. But Chulbatkan in Russia later this year, you'll be -- you're focusing on upgrading the high grade portion of the resource by year-end. I mean what are the checkpoints for this project? I understand it could be in production by 2025. Just from your point of view?

Yes, again, we're really excited about this opportunity and it really, again as I said earlier from an M&A strategy point of view, is right across the plate in that we have I think a competitive advantage in that part of the world, the Far East of Russia. I always make the point, Kinross this year, in 2020, we're 26 years old as a public company. We've been in Russia in the Far East for 25 of the last 26 years. So this is right across the plate. And then because it was a private asset deal, you'll recall we had about 16 months of due diligence where we had boots on the ground many times, we twined holes, we did chain of custody, both met testing. And so by announcement, we had a pretty good scoping sense of what this opportunity is. The deal closed in January, and we're off and running. I would say, we have had a bit of a COVID impact. I'm joking a little bit, but who would have thought assay labs is not an essential service in the Far East. So there are some backlogs and travel restrictions. But essentially it's -- we've got a bunch of drilling we're going to do this year. We understand the market will be hungry to get some status updates and we're not -- we've got to find the balance. Kind of, as a big company, we typically have kind of given an annual update with our guidance and year-end reserve resource. Clearly we know that folks are going to be keen to hear more sooner and it's just a matter of getting the right sort of batch of critical mass data that would make sense for a company of our size. I think we've drilled 2,500 meters by the end of Q1 and we will expect to get 5,000 done by the year-end. The timeline, you're right, it's PF and FS to be completed within the next 3 years. Right now, I'm always hopeful we can do a little better. We're targeting production in 2025. And again, this -- just again for context, 4 million ounce resource, a relatively high grade -- contemplating relatively high grade open pit heap leach open in all directions. So we're pretty excited about this.

Yes, that sounds very exciting and just 5 years to production from acquisition, that's pretty quick actually. I apologize, Paul. Unfortunately, we're out of time. And it's -- as I said, I've got a lot more questions to ask, but we hope to be in Barcelona next year, May 18 to 20, 2021, we'll see. But I'd like to thank you and Kinross participating in our virtual conference.

Thank you, Mike, and great questions, and we -- I look forward to catching up with you on the other side of all this when we get back to some normalcy. Thanks.