Eldorado Gold Corporation (EGO) Q2 2016 Earnings Report, Transcript and Summary

Good day. My name is Steve and I will be your conference operator today. At this time, I would like to welcome everyone to the Eldorado Gold Corporation Second Quarter Results Conference Call. [Operator Instructions] Thank you. Mr. Paul Wright, President and CEO, please go ahead.

Thank you, operator and good morning and thank you all for joining us and welcome to our second quarter 2016 financial and operating results call. I am here in Vancouver this morning with Paul Skayman, Chief Operating Officer and Krista Muhr, our Vice President of Investor Relations. As always, we have provided detailed financial and operational information in the press release from yesterday evening. Before I begin, I need to remind you that any projections and objectives included in our discussion today are likely to involve risks, which are detailed in our 2015 AIF and the forward-looking statement disclaimer at the end of the our news release. I am going to try to keep this call relatively brief recognizing that most of us here in Canada are eager to get out of the office and enjoy the long weekend. I will cover off the comments in regards to the financials sorry in Fabby’s absence and Paul will run through the operational results. During the quarter, we announced two transactions relating to the sale of our Chinese assets. The transaction with CNG for Jinfeng is progressing on schedule and we expect to close this within the third quarter. The timeline for the in-time transaction for White Mountain, TJS and Eastern Dragon is also progressing to schedule and we expect to close in the fourth quarter. When these transactions close, it will leave the company with an even stronger balance sheet as we are looking at netting just over $800 million from these two assets – sorry, these two sales. Add that to our current total liquidity and we are looking at having over $1 billion in total liquidity by year end on the balance sheet. Leading on to Greece, development at our Olympias Phase 2 is moving along and we remain on track for production in the first quarter of 2017. At Skouries, we are pleased to receive – we are pleased to have received our approval for our Technical Study in May and this decision combined with the earlier granting of the building permit has prompted us to restock construction activities at Skouries. We continue to remobilize our contractors and hire back our employees and an update of schedule in forecasted cost of completion will be made available at our next corporate update in September. In Turkey, our two operations there have continued with no disruption and all of our employees are accounted for and safe. Our experience in Turkey to-date over the last 20 years has been nothing but positive. Our team is confident that the country will move past this period of headline risk and continue as they had in the past to progress going forward. At Kişladağ, despite a weaker second quarter, ounce placement to the pad remains on schedule for the year and our increasing daily production is now running at a rate consistent with meeting our guidance for year end. I would like also to use this time to reconfirm guidance for the year. Gold production for 2016, including discontinued operations, is forecast to be approximately 570,000 ounces with average cash cost for commercial production of $595 per ounce and all-in sustaining cash cost of $930 per ounce. Previous guidance was production of 565,000 ounces to 630,000 ounces at average cash costs ranging between $585 and $620 per ounce and all-in sustaining cash costs of $960 to $995 per ounce. Capital spending for the year is forecast now to be $95 million in sustaining capital and $250 million in new project development capital. This compares with previous guidance of $105 million for sustaining and $235 million for new capital development. The forecast for new product development capital is slightly higher than original guidance, mainly due to projected higher capital spending at Skouries. Now, I will move on and make a few comments as it relates to the financial statements, highlighting changes in significant accounts. We ended the quarter with cash, cash equivalents and term deposits balance of $203 million, including $72 million reported under assets for sale compared to $292 million at the end of 2015. The decrease in cash balance is mainly the result of $38 million generated by operations before changes in working capital, a $30 million drawdown on our credit facility, net of $116 million usage of cash or capital program. Net cash provided by discontinued operations were $17 million. During the quarter, we announced two separate transactions to sell our interest in China for $900 million. With these two sales, we will have effectively disposed of all of our Chinese segment. And accordingly, the Chinese assets and liabilities are presented separate on the balance sheet as current assets held for sale and current liabilities held for sale. On the income statement, the results of the Chinese operations, is shown in a single line as discontinued operations, including an after-tax impairment of $339 million, representing the difference between the expected net proceeds on the sale of the Chinese assets and their net book value. Loss attributable to shareholders of the company was now $330 million or $0.46 per share for the quarter compared with a loss of $199 million or $0.28 per share in the second quarter of 2015. Gross profit from continuing operations for the quarter of $42 million increased slightly year-over-year as the impact of lower sales volumes were offset by higher gold prices and lower unit operating costs. Gross profit from discontinuing operations for the quarter of $14 million decreased year-over-year due to lower sales volumes. With these comments, I will hand over to Paul Skayman.

Thanks, Paul. Good morning, everyone. Overall, a somewhat tough quarter with Kişladağ and Tanjianshan both performing a little bit under our expectations. To start in Turkey, Kişladağ had a slow quarter with ounce production lower than anticipated. Tons of ore in White Mountain and ore placed on pad were above budget at a slightly lower grade. The year-to-date strip ratios are 0.92 to 1. With continued placing run of mine material on the lake spread given the higher gold prices we are now seeing compared to our budget at the beginning of the year. Ounce production is down year-to-date as we have been leaching the higher sections of the pad. Right now, we are placing material on new pad and expect ounce production to increase in the second half and we are still maintaining the initial guidance of the Kişladağ of 225,000 ounces to 240,000 ounces. At [indiscernible] project performed well during the quarter, reporting better tonnages at similar grades than expected. This led to a good quarter of ounce production with sales year-to-date slightly ahead of our budget. Cash costs have also been well contained in year-to-date are tracking under our guidance. In China for Q2, production totaled 50,800 ounces. Tanjianshan had another slow quarter, good tonnage rates mined and processed over the quarter albeit at lower grade than planned. The lower grade is a combination of narrower ore zones in the lower sections of the Jinfeng pit causing higher dilution and lower grades than calculated on ore stockpiles that are supplementing the mill feed. Cash costs were correspondingly high due to lower ounce production with similar spending. As we stated yesterday at Tanjianshan, we noticed the crack in the middle shale of the discharge and manhole and have had to shut it down for repair. This shale is correct in a similar location previously and we have the team and the know-how available to weld it up relatively quickly. It’s expected to take 3 to 4 weeks to get back into full production. Jinfeng had a reasonable quarter doing better than budget on both ounce production and costs. White Mountain was slightly behind on tons mined and treated and also behind on grade. This left us with higher cash costs than expected due to the lower ounce production. On the development side, works continuing well on the construction of Olympias Phase II. Demolition work is now complete, still work is starting to arrive and be erected on the site. Most of the long lead items have arrived at site and structural and mechanical contracts have been awarded with one of the contract has already mobilized and at work. Preparations also continue underground with rehabilitation of existing workings and new development is proceeding at budgeted levels. As indicated on the previous call, we received the approval for the updated Technical Study on May 9 for the Skouries project. We have now put some of the teams back to work with the ramp up of the site expected to continue over the next quarter. The focus of this work will concentrate on those items that benefit from the excellent weather over the summer period. This work includes earthquakes and building foundations as well as improvements to the access road to the tailings management facility. Both Certej and Tocantinzinho continue to work to optimization studies on opportunities identified earlier in the year. And at Eastern Dragon, we continue to work with the government on the conversion of the exploration license to the mining license. In exploration, we completed 7,000 meters of exploration drilling at our projects during the quarter as well as target generation work to drill programs planned for Q3, Q4 And with that, I will turn it back over to Paul.

Thanks Paul and operator, we will open up for questions now, please.

[Operator Instructions] Your first question comes from Cosmos Chiu with CIBC. Your line is now open.

Hi Paul, Paul and Krista and thanks for hosting the call. Just a few questions or maybe first off on the new guidance, the refined guidance, the 570,000 ounces, so I want to confirm, that includes the Chinese assets for the full year, right?

That’s correct.

Okay. And I guess from that perspective, the actual number of ounces produced will likely be different depending on the closing of the two Chinese transactions?

Absolutely, yes.

And then Paul on that, I see that there was a crack in the mill, the mill sell in the quarter, could that potentially have any kind of impact on the closing of any of the Chinese...?

No, we don’t see that affecting us.

Okay. And then Paul you kind of talked about Turkey and the political situation there, I am trying to approach it from a different perspective, in terms of the I will say weakening Turkish lira, could that have any kind of potential positive impact on your cost?

Well, we have historically benefited from a weakening Turkish lira. Eventually inflation tends to claw this back, but I would say this year, in the countries that we operate where we have seen a devaluation of the local currency against the U.S. dollar, that devaluation is being in excess of inflation. So yes, there is some potential for incremental gain.

Okay. And then maybe one last question for me. I noticed that the grade at Efemçukuru was off a bit during the quarter, could you comment maybe on what the grade could be – are we going to see an increase in grade in the second half, is that – is Q2 representative of the future?

We do a little bit better. And in fact year-to-date, it’s fairly close to budget. So Q2 was a little bit lower than one. And year-to-date, we are sort of pretty where we want to be, I guess.

Great, that’s all I have. Have a good long weekend.

Thanks Cosmos.

Your next question comes from the line of Dan Rollins with RBC Capital Markets. Your line is now open.

Yes. Thanks very much. I was wondering if you guys could maybe just comment on the cost, obviously you have taken your production down to the low end guidance, but your costs are still remaining quite low and specifically excluding the Chinese assets divested, but both Kişladağ and Efemçukuru you are probably about $50 to $75 an ounce right now, below on your range for the full year on operating costs, is that a reflection of the currency which is down, I guess around 5% to 6% versus your guidance or is there some other aspects that work there that are allowing you to have lower cost than expected starting the year?

I guess currency has helped a little. I am trying to recall what we sort of put the budget together at. I think we are still pretty close…

550 to 600, yes.

In terms of [indiscernible] inventories increased slightly at Kişladağ and I think that’s probably had a positive effect on the cash cost in the short-term. And the guys, particularly at Efemçukuru continue to sort of grind way in terms of efficiencies. And I think we are seeing that too, so some kudos obviously to the guys operating those projects in Turkey.

As Paul alluded to, I don’t think there is anything other than currency that we can specifically point to, Dan, or it’s a combination or frankly working to make the operations better.

Okay. So on a local currency basis, you are pretty comfortable that the current rate is you hope excluding the impact on the strip ratio or moving or having flowing over the next…?

I am not sure I understood the question, Dan.

Well, your unit costs on a local basis, where you are today, do you believe those are sustainable, what you are paying in Turkish lira?

Well, I think as I mentioned earlier, I would expect that in over time, historically, inflation tends to claw back most of currency gain. Live with us year-by-year on this, Dan.

Okay, that’s fine. And then just on the sustaining capital, any change with the $50 million plan at Kişladağ for the year and $20 million at Efemçukuru?

No.

Perfect. I will look forward to September 7.

Your next question comes from the line of Kerry Smith with Haywood Securities. Your line is now open.

Thank you, Operator. Paul, I am not sure you can answer it or not, but there was a big year-over-year swing in the accounts payable in the non-cash working capital change, it was like $70 million, do you know exactly what that looks for?

So just say that again Kerry, I didn’t quite get that.

There was $70 million swing year-over-year on the accounts payable and the non-cash working capital and I was just wondering what that was related to?

Before I just thank Kerry, it was the reversal of the [indiscernible] put option that’s primarily related to that.

Sorry, the reversal of which?

CDH, the put option that we have with CDH who is our partner in Eastern Dragon.

Okay. I see. Okay. And just on the guide…

The put option expired Kerry, that’s why the change in the treatment.

Okay. And then just on the guidance, you said the production guidance hadn’t change for Kişladağ, Paul has mentioned that in his commentary, is the Efemçukuru guidance that you had initially earlier in the year unchanged as well, the 90 to 100 then?

Yes. That’s pretty well where they still think will end up, Kerry.

Right. And then the cash cost guidance that you have given early on here in January, what is the cash cost guidance now for the two Turkey operations, is that actually the same as it was as well?

We haven’t provided that, have we?

No. But – so you are not going to provide.

No.

Okay. You have just given the kind of the overall. Okay.

That’s right.

And you talked Paul in the opening remarks about the $800 million of net proceeds from – can you remind me what the debt is that will come out of the $900 million?

Sorry, the what?

Presumably it’s debt or what is the adjustment, like why is the 800 million and not 900 million, I am just trying to...

An allocation there is an assumption as it relates to withholding tax.

Okay, so that’s where you are working on, okay.

We don’t know the exact amount. We are giving you an approximate level based on withholding tax. I mean then there are the usual adjustments for working capital and we are obviously continuing to operate the operations. So we have given you the $800 million as an approximate number, making certain assumptions as it relates to withholding tax and there will be an additional adjustment related to working capital as well as frankly, monies in accounts that had been earned through the period.

Got it, okay. Perfect. Thank you.

So that’s why we can’t give you a nice number, two decimal points. But those were the components that go into what we will end up occurring when the transaction is closed.

Okay, that’s good. Thank you.

[Operator Instructions] Your next question comes from the line of Anita Soni with Credit Suisse. Your line is now open.

Good morning guys. My question relates to Kişladağ, I was just wondering on the heap leach, you have maintained the production guidance for the year, that partly answers my question, but you are expecting to get those, that full leach out by the end of the year or will it sort of push into 2017?

Well, I think what we described to you is the fact that we have been – we have had delayed production coming off the heaps because of the higher lifts, alright. It’s not associated with lack of ounces being placed. It’s just the cycle that you are in terms of delayed leach-ins time to get on to the top of the heap to the bottom of the heap. Bigger scale, the ounces to the pad are essentially on track with where we expected them to be. The mine plan we will see as continuing to load at an appropriate rate and the daily ounce production has been rising to the extent that we can, projecting forward to year end. We are satisfied with our guidance in terms of the range that we provided. That’s what we said.

Alright. Thank you.

Your next question comes from the line of Steve Butler with GMP Securities. Your line is now open.

Good morning, guys to you out there. Paul, quick one just on the sale of the Chinese assets again, so let’s look at the $71 million in cash sitting in discontinued assets for sale. So cash, if there was any cash building as there has been a somewhat small amount, does that accrue to your account from negotiations for the Chinese point of view, cash in the assets or is it working capital adjustment that goes their way?

Well, those are the two separate issues. There will be a working capital adjustment that you typically see at any type of transaction at close. And then there will be the fact that we have been accruing through operations cash that generally accrues comes to ourselves, because it’s been earned by the period of our ownership, right?

Yes. Okay, that’s good. Just want to clarify that. See you guys in September.

Likewise.

Thank you.

[Operator Instructions] There are no further questions at this time. Mr. Paul Wright, I turn the call back over to you.

Okay. Well, thank you operator and thank you everybody for joining us today. We hope everybody has a good weekend and we look forward to seeing many of you or hopefully most of you in September. Thanks, operator.

This concludes today’s conference call. You may now disconnect.