Kinross Gold Corporation (K) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Kinross Gold Update on Tasiast Operations. [Operator Instructions] Thank you. I will now turn the call over to Chris Lichtenheldt, Vice President, Investor Relations. Please go ahead.

Thank you, and good morning. With us today, we have Paul Rollinson, President and CEO; and the Kinross senior leadership team, Andrea Freeborough, Paul Tomory and Geoff Gold. Before we begin, I would like to bring your attention to the fact that we will be making forward-looking statements during this call. For a complete discussion of the risks, uncertainties and assumptions, which may lead to actual results and performance being different from estimates contained in our forward-looking information, please refer to our news release dated June 21, 2021. We are still in the early stages of investigating this incident, and the estimates and assumptions we are making today may change as we get a clearer picture of the full impact from the fire. I will now turn the call over to Paul.

Thanks, Chris. Good morning, and thanks, everyone, for joining us on a relatively short notice. As you all have seen, we issued a follow-up press release last night with an update on the fire that occurred at Tasiast a few days ago. Our team did an excellent job responding to this emergency, which, most importantly, prevented any injuries and also greatly reduced the potential impact. The fire was under control within several hours of the onset, although it took a couple of days to completely extinguish and reduce the heat in order to regain full access to the facility. The exact cause is still under investigation. However, there was welding taking place when the fire began, which we believe is probably connected. Several government authorities have visited the site and have expressed support for the company and offered help in our efforts to repair the damage. We still have considerable work ahead of us before knowing exactly what is required to restart the mill, but at this point in time, our preliminary estimate is to restart by year-end. Fortunately, the fire was mostly contained to the trommel end of the circuit, and therefore, mining activities and project work have already resumed. The continuation of mining, including accessing higher grades in the West Branch for later this year, should allow us to get back to our pre-pandemic production plans relatively quickly, securing our outlook for strong growth and cash flow going forward. Importantly, at this point, it appears to be only a '21 production issue. Additionally, we're pleased to report that all critical path items for the Tasiast 24k project will continue to advance as planned, and we still expect the expansion to be complete by mid-'23. As a result of this setback, we are revising our 2021 production guidance from 2.4 million ounces to 2.1 million ounces. Approximately 230,000 ounces of this change relates to Tasiast with the remainder related to the wall movement at Round Mountain we disclosed earlier this year. While we were updating our guidance, we wanted to have the most accurate representation of our current estimate for '21. Importantly, we continue to expect strong production growth going forward and are maintaining our production guidance of 2.7 million and 2.9 million ounces for 2022 and 2023, respectively. In terms of cost to repair, our current forecast is up to $50 million. We do have insurance policies to cover property damage as well as lost profits during the interruption, and we have begun the claim process with our providers. In conclusion, we have experienced an unfortunate turn of events at Tasiast, but I'm extremely proud of how our team has managed the situation. And we're happy to report that the ultimate impact to the asset and to our company is temporary and something we will overcome. With that, operator, I'm happy to open up the line for questions.

[Operator Instructions] And we have a question from the line of Josh Wolfson of RBC Capital Markets.

So the guidance update incorporates a new production. Is there any sort of disclosure you can provide on the impact to cost or capital? I know it's early, but any sort of early thoughts would be helpful.

Yes. The capital -- again, what we know today, and again, I'd just sort of give a little bit of context. I mean this happened last week. It's a day-by-day thing. And our understanding is growing every day. So I did say at this point in time, we think up to $50 million. We may come in less, but that would be sort of the capital. On the cost, I mean, there's going to be sort of a numerator-denominator effect with the lack of revenue and still carrying some of the overhead. We're still working through some of that. And we've -- from an ASIC, if that was the question, we're still just trying to understand what the accounting implications might be. But again, it's -- to us, this is more of a production and obviously a temporary loss of cash flow. Fundamentally, we don't believe the value of our assets has really changed. We'll be back up and running full steam '22, '23. And so we very much view this as a temporary pause in cash flow that we'll get back to.

Okay. And then just to understand what the sequencing looks like at Tasiast now, this is supposed to be a pretty heavy year for stripping, both, I guess, catching up for last year's lost time and also in preparation for the next phase. Should we expect the same volume of material to be required to be moved this year to be able to access the high grades later this year? Or is that -- can you sort of taper back maybe some of the spending associated with that in light of these events?

No, Josh, we're going to continue with the mine plan. So the mine is back up and running. We're down for a couple of days. And we continue to strip and mine at the same rate as we were before. And so the net effect here will be -- we were, as you know, anticipating getting at the higher-grade material in the fourth quarter. We will continue to do that. And depending on when the mill comes online, we will build a stockpile of higher-grade material. That will provide more operational flexibility as we get into next year. '22 and '23 will remain very high-grade years. So we're just going to build up a high-grade stockpile.

Okay. Got it. And then last one, just to understand the net impact of production this year. Is there any sort of disclosure you can provide on what the quantum was related to Tasiast versus maybe other operations, which would have been included here?

Yes. So Josh, Paul alluded that in his scripted remarks. But the impact of Tasiast is around 230,000 ounces here. And with the Round Mountain failure that we -- the geotechnical issue that we previously disclosed, we were already down near the lower end of guidance. So you just take that number, subtract 230,000, and that gets to the new guidance number. So really 230,000 from Tasiast and subtract that number from the lower end of previous guidance, you get to the 2.1 million plus or minus 5%.

Our next question comes from the line of Matthew Murphy of Barclays.

Just -- I mean, not just Tasiast, I guess, but as you think about Round, I'm wondering how you feel about 2022 guidance around cash costs and CapEx. Has any of that changed in your mind?

I know as Paul alluded to in his scripted remarks, we are not changing '22 and '23 guidance. And so our general outlook on key metrics remains unchanged.

Ironically, I mean, I don't -- maybe it's a stretch to call it a silver lining, but this will allow us to catch back up on our mining rate. And we will actually be going into '22 and '23 a little stronger. So I guess if there was a silver lining, we're going to -- we're not going to lose any real downtime here with the project in terms of mid-'23. And we're going to come in stronger in '22 than we otherwise might have.

Our next question comes from the line of Anita Soni of CIBC World Markets.

So in terms of -- I'm just trying to tie in Tasiast and Round Mountain together. So Round Mountain, there was these production impacts you talked about it being 70,000 ounces, I guess, or if we did the math on the 230,000 less the 300,000, I'm getting to 70,000, but that was for half a year. So as we look out for the next year and the year after that, we're not seeing a resolution on Round Mountain until about 2024, 2025 at this stage with CapEx being spent in the next couple of years to fix that. So I'm just wondering where that production shortfall on 100,000 ounces would be made up at other assets outside of Tasiast? I'm assuming Tasiast will continue on at the pace that you had expected previously with these higher-grade stockpiles. But I'm just trying to understand how Round Mountain is being made up.

Right. So you're correct, Tasiast will be back on track for '22 and '23. So there's essentially no change in our production profile there. At Round Mountain, and we talked about this on the quarter, Round Mountain doesn't just rely on Phase W ore, so we are making the moves around additional stripping on the layback and moving the waste dumps. But Round Mountain does provide for a number of others ore sources. So we have continued outperformance in the historical heaps. We've identified a couple of areas in the legacy parts of the pit where we can access ounces. And for example, in the waste dump that we just moved in -- as part of this mitigation plan, we encountered ounces. So there are numerous ore sources at Round Mountain that we can tap into that weren't in the previous plan that can backfill a large part of the gap at Round Mountain. The rest of the gap as it stands with regard to previous lines at Round Mountain is really just bits and pieces here and there that we're able to backfill across the portfolio. But principally, Round Mountain almost makes itself whole through some of these other ore sources. The principal impact is this year.

Okay. And then just in terms of the capital, you mentioned on the prior question that the major components of your guidance are unchanged for 2022, 2023. So cost would be declining from the $800 per ounce level, I guess, prior to this issue at Tasiast for this year. So it should be declining into next year. And capital numbers are going to be around the $800 million mark outside of what Round Mountain adds to that? Is that correct?

That's correct, yes. So the cash cost impact, the drop in '22 and '23 is principally a denominator impact as we get into a higher mix of production from La Coipa and Tasiast. And the same is true for CapEx.

Okay. All right. Do we have an estimate yet on what Round Mountain would add for capital next year?

That's a good question. We'll get back to you on that, but there's going to be added stripping dollars. The question is, given that we have a limited mining capacity, whether it's money that -- whether it's new money or stripping just continues a little bit longer. The IR team will get back to you on that. But my gut sense is that we're not going to have a huge increase in capital in Round Mountain simply because of the fixed rate of mining.

[Operator Instructions] Our next question comes from the line of Carey MacRury of Canaccord Genuity.

Just in thinking about the timing of getting the mill back up by the end of the year, what are still the sort of biggest unknowns at this point in time that can affect the timing or the cost?

Yes. Thanks, Carey. We had the delay between the 2 press releases so that we could build up information as to the condition of the mill, and we made substantial progress in derisking our view as to the extent of the damage. In the press release, we say up to 6 months. We've confirmed that the damage is principally on the discharge end of the mill, the shoot, the trommel screen, cyclo pack, some piping and some general debris. Our initial concern was whether there was damage to the motor itself or to the mill shell. We haven't 100% derisked that, but I'd say we're at about 90% confidence that the motor is going to be in okay shape, same with the mill. So what remains here is continued electrical and mechanical checks on the motor and the mill over the course of the next 2, 3 weeks. But like I said, we're at a high degree of confidence that those are unimpacted. And I'd also refer you to the pictures in the appendix of the press release. You can see that the motor casing is in pretty good shape. So the work will principally be around replacing the trommel and some of those other associated elements that I said. And at this point, we do believe that there's some upside to that 6-month estimate.

And then in terms of the $50 million in costs, is there -- what's the probability that -- could that all be recovered by insurance or just a portion of that?

Carey, it's Andrea. Yes, there's a customary deductible associated with that, but we do have property insurance. So as Paul said, we've started a claim, and we expect that we'll be able to recover parts of that.

Okay. And then maybe just one for Paul Rollinson. I noticed in the press release, you talked about capital allocation and potentially a share buyback. I guess the question would be just what do you need to see from Tasiast in order to sort of move ahead with a decision like that?

Yes. Again, thanks, Carey. It's a good question. I mean we just -- look, we're days into it sort of thing. And as Paul said, we're -- our confidence is getting a little better everyday. We fundamentally have conviction in our business. We see our production and our cash flow coming back pretty strongly. Candidly, I think we got oversold in the market on this. I understand what uncertainty can do. But as I said in the narrative, I believe our business is fundamentally worth the same as it was. So all that says, we haven't -- our messaging around return of capital is consistent. This is not causing us to back away. We are giving a narrative that it was really not a question of if, it was a question of when. But obviously, we want to give it a couple more days here, get through this, make sure Tomory's 90% view is -- holds up. And we still think it makes a lot of sense because we do believe our shares are -- were undervalued and, in particular, are undervalued now.

Our next question comes from the line of Tanya Jakusconek of Scotiabank.

Can you hear me?

Loud and clear.

Okay. Great. This is a question for Paul Tomory. Paul, maybe just -- can you review with us what -- with the mill being down, what things that you are able to do or pull forward on the 24k, if anything? And any of the tie-ins that you were supposed to do for the 21k that was coming in, in Q4, are those any that you can pull in faster because the mill is down?

Thanks, Tanya. We kept in the press release the timing on the 24k to mid-2023, but we do see opportunities to combine some of the work in the reconstruction of the SAG mill here with some of the 24k scope element. So over the next few weeks, that's going to be one of the big focuses of activity is how do we potentially optimize the reconstruction with the 24k plan. So you're quite right, there is some opportunity to optimize. Your second question on the 21k tie-ins, obviously, with the SAG mill down, some of the tie-ins that we're going to do this year are going to be easier. In fact, we filled the thickener this morning and last night a little bit ahead of plan partly as a result of that. So most of the times in the 21k will be a little bit easier now through the rest of the year. But we did move out the time line for the 21k ramp-up by a few weeks from the end of this year into the first quarter of next year. But bottom line, we do believe there's opportunity to pull forward some of the 24k elements. We're going to start to work on that. And the process for tying in the 21k will be a little bit more straightforward now.

And maybe can we just talk about just all the personnel experts that are needed on site for all of these repairs and just getting everything up and running. Are they on site? Do you have them in-house? Maybe just some clarity on that.

Yes. So there's a number of different skilled trades that will be required here, several areas that we're working on. We're going to put together a cross-functional team from across the company. We have other large mills in the portfolio. We're going to be bringing experts from around the company. We also have a team from corporate heading over tomorrow night from the metallurgy group that will be assisting in the optimization plan for the rebuild, the 21 and the 24. We have our technical experts from ABB, the supplier of the mill motor on-site. In fact, they've already performed a lot of the preliminary checks on motor condition, and those came back with check marks across the board. And then lastly, mobilizing some of the trades for the rebuild. We do have some contractors already mobilized at site for the 21k construction. It's conceivable that we utilize some of those as we get into reconstruction. And as you might expect, a whole bunch of the contractors and suppliers on the original 12k projects have already reached out to offer their assistance if we need it. So we feel pretty confident about being able to mobilize the right talent and resources in pretty short order.

And then just maybe lastly, just to finish off on just the supplies that's required, obviously, replacement of the trommel and some of the other pieces. Can you just review with us like where those would be coming from and when you expect it on site and then when -- and just the tie-in on all of that, just so that we have a timing on that.

Yes. So the -- if you consider that the motor and the mill are okay under that assumption, the critical path on this rebuild is the trommel screen. And so that's how we start with the 6 months. We are looking at opportunities to have a custom trommel fabricated by a non-OEM shop. And so that is the longest lead time item, but we're already working on that. So we would be spec-ing, fabricating, delivering to site and installing. I'm pretty optimistic that we can beat the 6 months. But the reason we stuck with 6 months in the press releases, as we alluded to earlier, that's our 90% confidence level that we can hit 6 months. There is a scenario where we're done in 3 or 4 months, but that's a lower probability, and we didn't feel comfortable putting that in the press release. But to answer your question, the trommel screen is the critical path item. And we're already working on sourcing one. We, of course, also have to replace the cyclones, a bunch of pipes. But these are, comparatively speaking, easier items to source and replace.

Our next question comes from the line of Mike Parkin of National Bank.

My questions have been answered.

At this time, I'd like to turn the floor back over to Chris Lichtenheldt for any additional questions.

So Jackie from BMO is on the webcast and has sent in a question. Will you ask Andrea to comment on business interruption insurance and how much loss profit we expect to recover?

Jackie, so we do have business interruption insurance as Paul noted. Again, there's a customary deductible related to that. But we do expect to recover lost profits. It's early days. It will take some time. So obviously, the lost profits occur this year, and then the claims are in process, but it will likely be a longer period of time before we actually get the insurance cash recovery.

Which is typical. We've seen this situation before.

Yes.

We'll work it through. It takes some time, but we have reinsurance in place so...

We have the insurance, and we expect that we will recover.

Yes. Any other questions in the queue, operator?

And I'm showing no phone questions at this time.

Okay. Well, look, thanks, everyone, again for joining us on short notice. We'll be in touch. It is a situation where literally, day by day, we'll know a bit more. And we'll be in touch, and we'll try to provide timely updates as we can. So thanks, everyone.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may now disconnect.