Kinross Gold Corporation (K) Earnings Call Transcript & Summary

All right. Good morning, everybody. Up next, we have Kinross. And from Kinross, we have Paul Rollinson, the company's President and CEO. So thank you for joining us this morning, Paul. Appreciate it.

Thank you for having us.

And I think just to kick things off, Paul, just going to provide a brief summary of the company, and then we will sort of go into some Q&A. So with that, I'll hand it over to Paul.

Great. Thank you, Tyler. Yes, I think we provided a slide deck, which I'll refer to as I make some opening remarks here. I think we've got 7 slides. I'll try to guide everyone through. In that deck, on Slide 3, we make the sort of the investment case why Kinross. So that's the slide I'm on. And the points we make there are -- we're obviously a large, by market cap, about $8 billion and highly liquid gold stock. We're trading about $150 million a day between New York and Toronto. We run a global portfolio. We have 8 mines around the world. We operate in North America, South America, Russia and Africa. We operate both open pit, underground in a variety of climates. So quite a strong global portfolio. In terms of size of production, again, we're at the larger end. We're producing about 2.5 million generally, but I'll get into this in a little bit more detail. We're going to be growing that production from 2.4 million up to 2.9 million over the next 3 years. Balance sheet to us, we're very focused on that. We're very strong. We have an investment-grade balance sheet, strong cash flow. We generated over $1 billion of free cash flow last year, notwithstanding COVID. And we think our valuation is attractive, very compelling relative to some of our peers. We pay a dividend, and we believe we have an attractive dividend yield. And then lastly, ESG has become, I know, more of a focus in the last couple of years with stakeholders. It's something we've always done. It's always been a priority, and we feel we've got a good story to tell there. There is the E, the S and the G. A lot of focus on the E and carbon, and we've certainly, like others, been focused on what we can do to commit to greenhouse gas reductions, and I'll talk a little bit more about that on a later slide. Moving over to the Slide 4. This is really a hallmark of who we are. We have a very, very strong technical acumen. It's our culture. Happy to say or proud to say that we have met or exceeded guidance for the last 9 years, and we managed to do that through COVID. We will get into it, but we did have a mishap last week with a mill fire, which is sadly taking myself for this 9-year track record, but we think we're going to bounce back pretty quickly. So a big part of our culture is operational excellence. Next slide. As I indicated at the outset, we've generally been in the 2.5 million ounces of production. With the mill fire we experienced last week, that setback, we've revised our guidance down to 2.1 million yesterday. We'll get into that. But notwithstanding that, we fully expect we'll snap back to -- and we have maintained our original '22 and '23 guidance. So this is a temporary effect between now and the end of this year. And what that shows is we'll get back to that growth up to 2.7 million and then 2.9 million. And then in addition to that, we've also provided guidance -- visibility that we expect will produce, on average, approximately 2.5 million going forward. That's our base with upside out to the end of the decade sort of thing. So that gives you our growth and solid production outlook for the next 10 years. Next slide is really about our liquidity and balance sheet strength. You can see here on the slide, liquidity of about 2.6 million. We got a very manageable -- our net debt-to-EBITDA was in and around 0.3 on the quarter. So very, very strong balance sheet. As I said, investment-grade rating and very strong free cash flow outlook, particularly as you get into those growth years of '22 and '23 and further. Of note, we did actually -- we had some notes due in September, $500 million, we actually prepaid those in June. So that balance sheet is very, very strong. It gives us lots of flexibility. ESG, as I said. I touched on it. As I do like to break it into the E, S and the G. In the E, we've got very, very strong tailings management systems. Some statistics here, how we're ranked by others independently. We actually believe on the ESG statistics, we do rank very well relative to some of our peers. And you can see that in the bottom left of Slide 7 with the greenhouse gas emissions. So we, too, are going to try to improve. We're looking for ways to improve, but we already have a very strong ranking. I won't go through all of this in detail. But certainly on the social, we've got a very comprehensive sustainability report, which is on our website, which I'd encourage you to -- for those of you who have an interest to take a closer look at. Safety is huge in our culture. And then on the governance, we do rank very well, again, independently on diversity, the independence of our Board. And so again, on an ESG -- from an ESG perspective, it's something we've been -- we -- it is an absolute priority. We're just trying to give a better lens and transparency for people to understand what we've been doing for many years. And that really just takes me to kind of the wrap-up slide. Where, again, we would -- I would just say there's some good statistics in here, which kind of recapture what I just went through, but we're technically strong. We have growing production. With that growing production, we have growing cash flow. That growing cash flow is on the base of an excellent balance sheet, and we have a very attractive dividend. So that's -- that would be my investment case for Kinross. Tyler, happy to take some questions.

Great. Thanks, Paul. That was very helpful. I guess just in terms of Kinross' production growth profile, you mentioned kind of growing to 2.9 million ounces by 2023 with sort of longer-term, sort of averaging 2.5 million at least sort of over the next decade as the base case. And then I guess can you talk a little bit about sort of the key assets or projects that kind of sort of underpins that profile?

Yes. And the context is what's enabled that growth is, I guess, 3 things. We have come out of a period, and I would say, in a sense, quite fortunate at a great time to be investing in our business from a capital competition perspective, we've had a significant reinvestment in our business. So capital investment. And that capital investment has contributed to mine life extensions, and that's certainly one of the pillars. So that reinvestment phase, significant over the past 3 years. The other would be, with that strong technical acumen that is part of our culture, we have a very, very robust, continuous improvement culture. So we're always looking at initiatives and efficiencies, ways to improve costs. And again, that all contributes to mine life extension as well. And then, I guess, lastly, I would say, we've had good success with our exploration programs, good success with the drill bit, and that's certainly been a contributor as well. When you get right down to the 2023, '24 period, the 2 key assets that are driving the growth on that base is the ramp-up of Tasiast with the 21k and 24k expansion project on top of that baseline of production and as well La Coipa, a mine in Chile that we're going to be reopening. So that's how we got there, and those 2 assets, in particular, are building off of the base to give incrementally more production than we had in the rearview mirror.

And then just sort of -- you mentioned that the opening sort of you sort of lowered your '21 guidance, mainly to the mill fire Tasiast and also some sort of wall movement at Round Mountain. And I guess you've talked a lot sort of recently about how you sort of lease sort of -- at least for the mill at Tasiast is more of a confined to this year, 2021, and then with Round Mountain that there's the opportunities to offset sort of a loss from being able to mine in certain areas. I guess for both of those, could you just talk about your sort of confidence sort of in that outlook and how it sort of ties into sort of the longer-term guidance over the next several years?

Sure. I'll start with Round. That was an event that we highlighted earlier this year. Look, we have -- again, I keep tying back to this technical acumen. At all of our sites, we have pretty good monitoring systems for detecting any kind of seismic event or wall movement in. We detected a slight amount of movement. So there wasn't a failure. It was just -- we started to detect some movement. And as a result of that, we made the decision to suspend mining in that area, at Round. And the engineers would say, look, the best way to remediate that is to remove stress. And that comes in 2 forms, really. What we're going to do is we're going to remove some waste material in that location that's sort of compressing and contributing to stress, and we're going to revisit the slope, the wall slope of the pit. But when we made that announcement, we were clear to say, again, we reaffirmed our guidance for '22, '23 and longer term. And we were comfortable to do that for a couple of reasons. One, the amount of -- and all it is -- there's no loss of ounces here. It's just we're going to move to a different location while we do some remediation, and those ounces are still there, and we'll get to them. And that's the beauty of Round. It's a great asset. It just keeps on giving. And the point there is we have other places to go. There's 4 or 5 other places to go within the pit. So even though we're not mining some of those higher grades when we thought we would, we'll get to them eventually. But in the meantime, we've got other sources of gold in 4 or 5 locations around the pit. We also at Round -- the mine is about 40 years old and still has a pretty robust mine life ahead of it, but we have some very big heaps there. And we don't model it per se, but what we've been doing is going into those heaps, we call it PSM, process solution management, and we've had great success and continue to have success of pulling gold out of those heaps. So between the additional ore sources, the PSM, continuous improvement, we have a lot of offsets and optionality in that pit to offset what might have been a loss of gold if you were only mining in one area. And the net effect of that is when you look at it over a life of mine perspective, we're essentially going to probably, at the end of the day, end up extending mine life again, but we knock out the production into the higher -- from the higher grade, what, a couple more years out. And -- so I won't get into the exact year-by-year breakdown, but the key point here is we haven't lost any gold. We're probably going to extend mine life, and that's the reason we were quite comfortable to maintain our guidance in '22, '23. So that's in a box, if you will. That hasn't changed. In fact, it's getting better. For example, Tyler, we just removed some of that waste I was talking about to relieve pressure. That was waste that was put there many years ago. Guess what, we found all kinds of gold in it, and we've processed it, and it's actually paying us to move it. So I would say nothing's changed on Round. If anything, it's probably improved in the last 3 months. Tasiast. Yes. So we had a step back last week. We had a fire. It was an accident. It's very unfortunate. Good news is our team got on it early. We got the fire under control. No one was injured. There was no safety event. We're still investigating. We think it was a welding-related incident, and we're only a week into it. And so it's been a day-by-day thing. We wanted to get a press release out as you would immediately, but we put the fire out, but we couldn't actually get in and do much examination. It's still too hot to get in there. Over the course of the weekend, we felt comfortable by Monday to put out an update where we've basically said, okay, we've got in. We've done some inspection. And this is a probability thing in the sense, but we're highly confident that we'll get this under control by year-end. And there's an additional probability that we'll get it done sooner. And what it is, is the fire was in what we call the back end, the discharge end of our SAG mill. There's a unit there called a trommel. And for those who aren't technical, it's a big sort of rotating barrel, drum, but it's rubber lined. And the welding seems to have heated a unit that -- maybe cause that rubber to catch fire. But we're pretty confident we can get all of this replaced back up and running by year-end. So to me, the Tasiast thing, it's obviously a setback. It's got us off guidance, but it's -- we're right back again in '22, '23, where mining has resumed. Projects are back on. We haven't adjusted our project expansion schedule. So it's just really a delay in access. Again, the gold is in the ground. And just for completeness, we are insured for capital and business interruption. So in the greater scheme of time, we don't see this as really a NAV impacting event over the life of mine.

And then I guess with this sort of growth that you're seeing, could you talk a little bit about sort of your -- the capital requirements sort of to achieve it and what your sort of your CapEx profile could look like over the next several years.

Yes, it's a great question. And I guess there's sort of a high-level answer and a bit more detailed. We have made public that the capital to support the growth to '23, so that growth to 2.7 and then 2.9 in '23 has a profile of 900 million this year, 800 million and 700 million. And that's built in. That is what we will get. That's what we expect we'll have to support that. And I'll give one caveat, which we may get into. We are starting, like everyone in the world, seeing some inflation effects. So I put a square bracket around 800 million, 700 million a little bit to -- that's not inflation proof, but it's certainly going to get you into the ballpark. To the extent, though, we extend production at that 2.93 million beyond '23, which is quite possible, I would expect the capital comes back up towards 900 again. And a good rule of thumb for us in our business for sustaining and reinvested capital -- growth capital is about $300 an ounce. So to the extent we're kind of guiding towards 3 beyond '23, I would expect that number to come up back up into the 900s. But the key I'd make there is it's quite manageable. It's not spiky. It's not lumpy. We don't see anything in our 10-year visibility that suggests we have a huge, big capital number that's out of sync with that sort of rule of thumb of $300 as we look out.

Great. And then maybe just last question on sort of the assets and the operations. Are there any assets that you think sort of right now are being overbooked by the market or that you think sort of have sort of significant potential going forward longer term?

Yes. I think it's often the case, and I wouldn't say it's just us, I'd say for others as well. I mean the reality is you just have less visibility on mine life in an underground mine. And it's a case where you've had underground mines that have had 5 years of reserves for the last 25. It's a matter of getting down there and having access to drill and look forward. And so Kupol is a good example, our mine in Russia, which has just been a fabulous asset, a cash engine, if you will. The original mine life there was back -- 2019. In 2019, what I would say is every year as we're extracting, we're drilling the vein ahead and replacing. It's not a one for one. But in the rearview mirror, our track record of extending those veins has been excellent. We had one of our best years ever for exploration replacement in 2019. At the time, we said best years ever. And in 2020, notwithstanding COVID, we had another best year ever. So the mine life has been at Kupol right now based on what we see is out to '25. Can I say it's going to go further? I can't with an engineering report, but based on the historical, I'm feeling pretty good about our ability to extend there not be an area where we probably don't get as much appreciation as I'd like. And then it would be the same effect for Toronto and Ghana, also on underground mine, where we know the veins continue at depth, and they seem to be getting higher grade. And we just have to keep developing and working our way down, and we keep -- again, we've got a mine life there of '25, 2025. But again, the veins are probably going to keep going. And I think those 2, in particular, there's just less visibility than in a big open pit. And then I'd be remiss if I didn't say, I mean, given the trading since the fire, I think the market is completely over rotated. The market cap adjustment on the company is less than the entire cost of what it was to build the mill. And we've said capital repairs could be up to $50 million. Yet, we've lost $800 million of market cap here for a temporary production effect. So I think -- I get it. There's uncertainty created. We're trying to give updates, but I do think -- watch closely because as we get closer to the reset on '22, I believe the market totally over rotated on the stock given what we understand the significance of the issue to be.

Right. And then just -- and you've kind of talked about this as well, including sort of more recently in the press release about Tasiast. But could you just, I guess, talk a little bit about capital allocation, sort of how you view that? And you've talked about just as your sort of production grows and the CapEx eases and free cash flow increases, more about sort of buybacks. Just kind of your thoughts around those areas would be helpful, too.

Yes. It's a great question. Look, I would say, again, for context, I mentioned we had a significant capital reinvestment. We just came out of it. So if we were to go back in time 3 or 4 years, we were facing a normalized kind of capital for us like bouncing around. If you take the 2.5 million and the $300, you're in the 7.50 in range. And we knew we were going to go into 3 years of about $1 billion of total capital to reinvest in our business. At the same time, gold price was $1,200. At the same time, the balance sheet was on a net debt-to-EBITDA probably in the 1.7 range, 1.7, 1.8. So when I think about capital allocation, I think about what are the needs of the business, what are the needs of the balance sheet and how are we feeling about the commodity? Fast forward to today, net debt is down to 0.3, capital reinvestment is behind us. And we're not at $1,200. I think we're in the context of $1,800, I'm biased to hire. So it's absolutely the right time to be talking about return on capital. We did reinstate our dividend last year. We felt we positioned it attractively relative to the average of the S&P 500. But as we look through the windshield into '22, '23 and beyond, we're getting to net cash and significant growth in cash flow. So what we've said to the market is, look, we get it. We understand that -- and we're all shareholders, the importance of the return of capital. We think the best way to build on the dividend, which we've advertised as not fluctuating, baseline dividend, $150 million per annum, expect that forever, barring some meltdown in the industry, we think the good way to build on that is with the buyback. And that's what we're looking at, and we think our shares are undervalued. And so we have just had a fire. But what I said about the buyback when asked is, again, given our confidence in our business, our ability to mitigate this event, our confidence in reaffirming guidance, we have not backed off on our view on looking at a return on capital with a buyback. We just want to give it another week or 2. The fire is a week old. That's the prudent thing to do, but everything is looking good in that direction.

Great. And then I guess we have a couple of minutes left. So sort of round it out. For -- just for the, I guess, industry, I mean, how do you think about M&A for Kinross sort of specifically and then just whether the industry could potentially sort of benefit from some more consolidation?

Yes. Look, again, I think the industry would benefit from more consolidation. We're based here in Toronto headquarters. There's a lot of companies here. I'll use a Canadian analogy. There's too many guys chasing the puck. And things can get bit up. And I see the benefits of consolidation is prioritization of development and prioritization of exploration budget. Getting there from here, getting to consolidation, easier said than done, very difficult. And speaking factually, it's in our -- it's not in the investor deck we provided, but on our website. Our -- we've looked at many things, and we're looking for basically bottom line industrial logic. We've only done a few transactions in the past several years, and they all have a theme. They've all been asset, cash and synergistic to our business, and we'll do those until the cows come home. They're not easy to find. The latest one was this tuck-in deal we did up in Alaska where we'll feed high-grade material into the Fort Knox mill. We certainly like that kind of M&A. But we're open. We're not -- we'll look at whatever makes sense, provided we can create value for our shareholders. So that's my industrial logic point. We'll see. It's not easy. Things aren't always what you think they are when you sometimes get under the hood.

Right. And then in -- we have about 2 minutes left. I guess maybe just sort of final question with -- we are seeing sort of signs of inflation potentially creeping up. We'll see if it's transitory or not. But just -- can you talk just quickly about what you're seeing and sort of your views on managing that, especially with the sort of the projects coming online over the next several years?

Yes. No question. Yes, we see it. I think the world is seeing. And I think that's maybe part of what's been giving a bit of a tailwind to the gold price. So to the extent there is inflation, we did maybe get a bit of a natural hedge there with the commodity. I'd start there. When we think about inflation, there's different forms. We're seeing it probably a little bit more in the steel in that end of the capital. In other areas, we feel we're in a good position. We learned some lessons in the previous cycle. For things like trucks and tires and cyanide. In the last cycle, I'm going back to, say, 2010, when things -- when everything the tide came up on everything, we really put a lot of thought into global procurement and supply contracts. In the previous cycle, you couldn't get Caterpillar trucks. The wait time on a truck was up to 37 months. We've got contracts in place. We're not going to be price protected, but we can be supply protected. We can buffer. We can stay out of the spot market. In the last cycle, tires, that should cost $30,000, $35,000 shot up to $90,000. We've got contracts in place to protect us against things like that, as I say. So we've given a lot of thought to these kinds of things, and we do hedge a little bit around the cost structure. It's trimming around the edges, and we've got oil hedges in place. We've got currency hedges in place. And then lastly, I would say, our continuous improvement initiatives. So we see it. We're always going to be trying to organically mitigate it with continuous improvement, manage our hedging. And then our global procurement strategy is the other way we would come at that.

Perfect. I think that's about all we have time for today. So Paul, again, thank you for joining us. I appreciate it, and take care.

Thank you, Tyler. Thanks for having us.

My pleasure.