Kinross Gold Corporation (KGC) Q2 2013 Earnings Report, Transcript and Summary

Hello. This is the Chorus Call conference operator. Welcome to Kinross Gold Corporation's conference call and webcast to discuss their Q2 2013 financial results. [Operator Instructions] The conference is being recorded. [Operator Instructions] At this time, I'd like to turn the conference over to Mr. Tom Elliott, Vice President, Investor Relations. Please go ahead, Mr. Elliott.

Thank you. Good morning. Welcome to Kinross Gold Corporation's conference call to discuss second quarter 2013 results. With us today are Paul Rollinson, Chief Executive Officer; Brant Hinze, President and Chief Operating Officer; and Tony Giardini, Chief Financial Officer. Before we begin, I'd like to bring to your attention the fact that we will be making forward-looking statements during this presentation. For a complete discussion of the risks, uncertainties and assumptions, which may lead to actual financial results and performance being different from estimates contained in our forward-looking information, please refer to Page 2 of this presentation, the news release dated July 31, 2013, management's discussion and analysis for 2012 and for the period ended June 30, 2013, and finally, our most recently filed AIF, all of which are available on our website. I'll now turn the call over to Paul Rollinson, CEO of Kinross Gold.

Thanks, Tom, and thanks to everyone for joining us today. I'd like to open by acknowledging the people across our operations for delivering another excellent quarter. This is now the fourth consecutive quarter in which we have delivered strong operational results and it is gratifying to see this consistent performance in those areas of our business that we can control. Of course, one thing that we cannot control is the gold price. As everyone knows, the gold price was highly volatile during the second quarter, falling from a high of $1,600 per ounce on April 1st to below $1,200 per ounce on June 28, a swing of over $400. This has created tremendous uncertainty for our industry. The bulk of my remarks today will address the steps we have taken at Kinross to address this uncertainty and to strengthen our business in a lower gold price environment. I want to stress that while the gold price has changed, our strategic direction has not. The Way Forward strategy we launched last year is designed to drive better results in any gold price environment and it positions us very well for dealing with these current challenges. With that in mind, let me put our second quarter results in the context of the 4 key strategic principles that are the basis of the Way Forward. We have stressed in the last year operational excellence, capital discipline, quality over quantity and balance sheet strength and liquidity. Our first strategic principle is operational excellence. Our operations drive cash flow and profitability and our strong focus on mine performance and cost control is particularly critical in times such as these. Looking at our operational results for Q2, once again we are very pleased with how our mines performed. Our second quarter production is higher than a…

Thank you, Paul. Second quarter revenue was $968 million, driven by consolidated sales of 695,000 gold equivalent ounces. Attributable production was 655,000 gold equivalent ounces, a 4% increase over the second quarter of 2012. The increase was mainly due to higher production from Tasiast and Fort Knox. Second quarter attributable production cost of sales was $737 per gold equivalent ounce compared with $724 in Q2 2012. On a byproduct basis, cost of sales was $697 per gold ounce compared with $659 in Q2 2012. Attributable all-in sustaining cost per gold ounce sold was $1,072 in the second quarter, up from $970 in Q2 2012. The increase was due to the timing of sustaining capital spending. We have adopted the World Gold Council definition of all-in sustaining cost starting with Q2 2013 and we intend to adopt the definition for all-in costs in 2014. Prior to the second quarter, we reported all-in sustaining cost, which conformed to the World Gold Council definition except for certain differences in the definition of sustaining versus non-sustaining capital expenditures and exploration costs. Our 2013 all-in sustaining cost guidance of $1,100 to $1,200 per ounce remained unchanged under the new definition. Average realized gold price for the second quarter was $1,394 per ounce compared with an average London PM fix of $1,415 per ounce. Second quarter margin was $657 per equivalent ounce sold, a decrease of 22% from the same period last year due to a lower average realized price and a slightly higher cost of sales. Adjusted operating cash flow was $257 million or $0.22 per share compared with $268 million or $0.24 per share in Q2 2012. Adjusted net earnings were $120 million in Q2 compared with $157 million in the second quarter of 2012. On a per share basis, adjusted net earnings were…

Thank you, Tony. Overall, we had a strong first half of the year. Our results continued to show progress we have been making as we have focused our operational -- on operational fundamentals and managing our costs. I am pleased to say that we are on track to meet our annual production and cost guidance at each of our operating regions and company wide despite the challenging industry environment. Since we launched the Kinross Way Forward initiative in the second half of 2012, we have had success in reducing both operating cost and capital expenditures. We have made significant progress in areas such as mine-plan optimizations, labor productivity and contractor management and supply-chain management. For example, our global efforts to reduce procurement costs continue to pay off as we have negotiated substantially reduced prices to input commodities such as calcium hypochlorite at Kupol, activated carbon globally and ground support for our underground operations. As I speak to our operating results, I'll be providing more color on some of the benefits we've been experiencing in our regions as a result of the Way Forward strategy. Our North American operations delivered a strong performance in the second quarter. Regional production was higher compared to quarter 1, namely due to higher production at Fort Knox and Kettle River-Buckhorn. In quarter 2, Fort Knox mill throughput improved while mill grades and recoveries were strong. In the quarter, we completed the installation of the additional CIC circuit [ph] on schedule. Production at Kettle River slightly increased compared to quarter 1 as the operation continued to experience strong grades and production from heap leach at Round Mountain performed ahead of our expectations during the quarter. At Round Mountain, as part of the Way Forward, we have continued to work on increasing pumping, piping and equipment capacity…

Thank you, Brant. Operator, can we please open the line for questions?

[Operator Instructions] The first question comes from Stephen Walker with RBC Capital Markets.

Just -- I wanted to follow up on Tasiast and the capital spending in 2013. You're continuing with the pre-stripping of the Greenschist and West Branch material. Can you give us a sense of, I guess, when we could expect some of that material to go on the dump leach and when we could expect that material to go through the plant, presumably at some point in 2014? And the grades we could be expecting to go through the 8,000-tonne-a-day plant, as well, please?

Brant?

Yes. As you know and as we have indicated, we have suspended the stripping at the Piment Central, which is a big portion of that $85 million savings for this year. Other capital savings within that $85 million are some equipment deferrals and some slowdown of infrastructure development. The -- as we indicated, the important part, the important component for us and for the existing mill or any mill going forward is to reach the Greenschist. We have continued the stripping program for this year at the West Branch and expect to hit the Greenschist sometime in the second half of next year. The grades of the Greenschist -- because we're in the middle of the planning process, we're in the middle of the strategic business planning process, in the middle of -- which is followed up by the budget process, and because of the fact that we have made the decision to defer any construction decisions on the 38,000-tonne-a-day mill, we're making some adjustments to our mine plans, though the grade that we encounter when we do reach the Greenschist is yet to be determined. So we'll provide more information as we proceed through the planning process.

Just to, I guess, circle back on sort of previous public information, first of all, what grades are actually going onto the dump leach now and what is going through the plant currently? And if I'm not mistaken, the grades of the Greenschist Zone, when you announce that resource, in the range of 2 grams to 2.4 grams?

Yes. The -- what we're -- currently what we're seeing -- what we're experiencing as we open up the West Branch right now is we're encountering a lot more heap leach material than what we anticipated. And a lot of that is lower grade. So we're doing some internal cutoff-grade adjustments, so that we put the best heap leach material on the leach pad. In addition to that, with the -- with what we're experiencing at the bottom of the Piment, you can see from our release what our grades have been for Q1, Q2. I would expect to continue to see those Piment grades into next year. And as we then transition to Greenschist, then of course we'll see the higher grades coming from our Greenschist next year.

The next question is from David Haughton with BMO.

A question for you on CapEx. To get to your revised number, what should we be looking at for the total 2013 CapEx at Tasiast and also for combined Kupol, Dvoinoye?

I think -- Brant? We've indicated that Tasiast will be down $85 million of the $150 million we're dropping the capital guidance for the balance of the year. Again, just maybe to elaborate a bit on [indiscernible].

And what number does that get for the total pool?

540.

540.

540?

Yes.

And at Dvoinoye, combined with Kupol, what should we be thinking about for the total for the year?

Unchanged.

Yes, it's unchanged. From the perspective of the capital that we anticipated spending in Russia, which includes Dvoinoye and Kupol, from a capital reduction perspective of the $150 million, we're not seeing a change coming from Russia.

All right. In your discussion, you had mentioned that for Dvoinoye you're still awaiting a subsoil license. What's the status of that and what are the implications if you don't get it by the end of September?

Yes. Look, we had some disclosure on our MD&A in our previous quarter, which prompted some questions and we thought we'd be -- we'd take the opportunity to clarify. I'd say overall, we're extremely pleased with how Dvoinoye is proceeding. As we've said, on schedule, on budget, targeted to produce in the fourth quarter. The upgrade to the Kupol mill is complete. As it relates to Dvoinoye in particular, we have received both a commissioning permit and a mine development plan approval, which allows us to get the mine underway. We do have a request for an extension of our license. We have no reason to believe we won't get that and, in fact, we expect it imminently. So everything is a go, and we do not have any concerns about that license extension. We've -- as I say, we've already got our mining permits approved.

And the price [indiscernible] that you're seeing so far out of Dvoinoye, are they living up to your expectation albeit in early stages yet?

Yes, and we've -- one of the things that I would certainly like to mention on Dvoinoye and Kupol, the performance both at Kupol and Dvoinoye has been excellent. And on the development at Dvoinoye, we're significantly ahead of schedule. And the development ore that we have been encountering, from a grade perspective, is meeting our expectations.

The next question is from Greg Barnes with TD Securities.

Paul or Brant, a question back on Tasiast again. You said in the past that the mill there is not the best you've ever seen and has some issues. How sustainable is it to run that mill without moving towards the bigger expansion?

Yes, we have said that. I think we still believe that. But look, as Brant also indicated, we are spending money there this year and making improvements to what we do have. But Brant, do you want to elaborate a bit?

Yes. Certainly as we've indicated, it wasn't the most robust installation. And the more critical piece has been the crushing circuit, the 3-stage crushing circuit. And as I indicated, we're in the process currently of upgrading that crushing circuit. We bought the new crushers and we're going into the construction phase later on this year and into 2014, and we'll have the crushers -- the new crushers delivered in the first half of next year. And that was the main piece. The rest of the mill circuit, we're going to have to do some minor upgrades and modifications to continue to supplement the construction that has been done. But I don't see anything huge.

And I would say, Brant, we are putting more rock through that mill than has even been put through the mill before.

That's very true.

So we're -- it's performing, is my point.

Yes, it is.

I guess to that point, you did put a lot of rock through the mill, above nameplate, and grades were a little above 2 grams in the quarter, yet cash costs were still 1,066. How do you see that going, even if you get into West Branch, which is the higher grade?

Yes. So there's a couple of things there that I would certainly like to point out. I mean, number one, on that is the -- we have indicated and we've talked a lot on previous calls on how, during this phase that we're in, with all the construction of the infrastructure, it does add an element to our costs that we just have to assume. In addition, for the year this year, and particularly for the second quarter, we have seen much more expensed stripping. I indicated that we ran into more heap leach ore in the Greenschist than what was anticipated. So that resulted in more expensed stripping. As well, we've had an inventory adjustment this quarter, which was -- which impacted us. But that being said, as we look at the Way Forward, the Kinross Way Forward, that we have been preparing for and have had the Way Forward in place for a period of time, and it is a foundational exercise that we have been going through for a period of time. And if we look at what we're doing at Tasiast, recognizing that the underlying performance there is very good, the things that we're doing to reduce costs at Tasiast next year, from a standpoint of the reduced stripping that we're looking at, the Phase Ib power, I think that we will -- as we go through the budgeting process this year, we'll see improvements next year. And the key is, of course, as we mentioned before, to get to the Greenschist with the higher grade, as well.

The next question is from Patrick Chidley of HSBC.

Just a question -- first question, just quickly on Tasiast, it's really a follow-up to a previous question. What is -- what was the strip ratio in the quarter? And what do you foresee for this year, next year on strip ratios? And is there a certain amount of stockpiling of ore that -- and can you tell us what those numbers would be?

Segue to Brant here but again, as Brant alluded to a moment ago, Patrick, given the decision to not make a decision until 2015 and given the across-the-board cost-reduction initiative we're undertaking and the fact that we're right in a cycle, the seasonal cycle where we do our long-term business plans that roll into our budget in October, we're in a -- we're currently rethinking what '14 will look like. So Brant, maybe just to comment on the first part of the question, which is earlier this year.

Yes. And for this year -- I think you had 2 questions. One was about the strip ratio that we're encountering this year and then the stockpiling question. From a standpoint of the strip ratio this year, our expected strip ratio was right around 3.5 this year. What we actually experienced so far was about a 3.3 strip. As far as stockpiling, we are certainly doing stockpiling. We are mining in the bottom of the Piment and so the material that we're encountering is a much larger ore zone, more continuous in the bottom of the Piment and it does require a stockpile scenario there. So we do have a stockpile in front of the mill from the Piment. As well, too, as I indicated, we are encountering a lot more low-grade heap leach material as we're opening -- as we continue to open up the West Branch. The lower grade material, we are stockpiling that in favor of putting some of the better grade leach material on the leach pad.

Right. So that's really what's happening, is the low-grade ore is being stockpiled from the West Branch as heap leach material?

Correct.

Okay. And just -- second question, just quickly, just big picture question. Good -- great operating numbers this quarter. The market's still very focused, I believe, on all the negatives in the gold industry and -- including obviously the write-downs going on. What's the big picture good news that you can bring? You did refer to some encouraging drill results at several sites on exploration but can we get more detail on some of that?

Yes. Look, typically we would -- as a senior producer, we don't sort of publish the exploration results on the fly. We consolidate towards the year end and give an update. We have been giving a flavor, as Brant did on this call. And you're right, it is a bit of a tale of 2 cities on this quarter. Operationally we've had our -- as we indicate, it's a key focus for us. This is our fourth consecutive excellent operational quarter. The other tale is really all about the gold price and we're running our business on what we can control and we can't control the gold price and unfortunately that gold price has led us to deal with other issues, such as the impairment and the need for cost reduction and a focus on the balance sheet. I think what you can count on from us, Patrick, is I'd like to think, we set out 12 months ago with a strategic direction and a message and I think we've done what we said we would, including making tough decisions. And we're going to keep that operational focus, we'll keep the capital discipline and the pursuit of quality over quantity. So we're heads down, running our business.

The next question is from James Bender with Scotia Bank.

My question is on the cost side, specifically on cyanide, tires, consumables, labor and maintenance. Have you been experiencing any sort of relief on that side? And if so, would you be able to provide fairly how much, like 5%, 10%, or what you've been seeing?

Yes. Again, I think what we would say -- I mean, looking back over the last 12 months, the situation we were in, the industry was in 12 months ago, where there was huge cost pressures and escalation across the board, we have definitely seen the pressure, if I can call it that, come out of the system. The pricing doesn't move as quickly as the gold price and it tends to be sticky but definitely, we've seen the pressure come out and improvements. I mean, if we wanted to get into a lot more detail, we could try to do a call with you off-line here and go through some of this but generally -- Brant, I don't know if you want to add to that.

Yes. As I indicated in some of our opening remarks here, that we had been focused on where the opportunities are to enter into agreements with our suppliers to improve on our cost profile. That being said, one of the strategies that we have and what we want to do here is, during the times now when it is potentially more favorable, is continue to build our relationships with our main suppliers and enter into longer-term contracts, both from a standpoint of taking advantage of and looking at opportunities for lower costs and maintaining long-term relationship with these key vendors and key suppliers.

The next question is from Brian Yu of Citi.

My questions deal with Tasiast and the CapEx. I think from my notes from last quarter, you look like all the infrastructure investments you're making now. And that CapEx totals to about $350 million, and this is all based on the old numbers. So from a sustaining CapEx standpoint, given what you've got going forward, can you give us a rough estimate of how that might track?

Let us think about that.

Yes. And I will say, from a sustaining CapEx standpoint going forward -- and I hate to dodge the question and I apologize for it. But as we indicated, we're in the process right now of reevaluating and looking at our stripping rates. And what we will be doing is, as we go through this and expanding on the Kinross Way Forward strategy at all of our operations, we'll be coming out with more information on where we see capital going later on in the year. And as Paul mentioned, we expect to give some update on that in our Q3 release.

Second one is also on Tasiast. I think in the MD&A you guys mentioned that there's some possible labor action there. I was wondering if you could elaborate on what's going on?

Brant?

Yes. What we're experiencing there right now is just a local issue. It's a disagreement between the labor and management there and they're working through it. And the expectation is that both sides will work together and come up with a solution.

Next question is from Alec Kodatsky of CIBC.

Just a couple of clarifying questions, just on Tasiast. Sorry to come back to it again but, for the purposes of your all-in sustaining guidance this year of $1,100 to $1,200, what are you looking at out of the $540 million you're spending at Tasiast as being sustaining in that figure?

Yes, Alex, it's Tony Giardini. I can answer that question. I think we've broken out this capital in previous calls. In fact, I believe in the first quarter call we had a breakdown and it's not being treated as sustaining capital. It's being treated as growth capital. So it's not factored in as part of the sustaining capital number. And we have indicated that we're maintaining our guidance, $1,100 to $1,200. We're obviously running on the lower end of guidance over the first 6 months of the year and the -- that's largely due to the timing of expenditures on capital. And so we've looked at where our capital spend will be for the remainder of the year, factoring in the reductions, and we're still comfortable with the $1,100 to $1,200 guidance range that we provided.

Okay. So the deferral is not causing you to rethink the all-in number?

No.

And just as a follow-up, probably for you as well, Tony. In the past, you've been able to capitalize a reasonable amount of interest and, with the deferral of the project, will you still be able to do that or will there be a change?

Yes, it's a good question. And what's happened is one of the changes that came out of the World Gold Council was related to how capitalized interest is treated. And so capitalized interest is actually not included in the all-in cost now. So it's one of the changes that came out once the World Gold Council published the standards. So it won't be factored in. The flip side of that is that there is an inclusion for reclamation costs in terms of accruals. So that go in -- as I indicated in my remarks, there have been some changes. But when we factor the impact of both of those, they seem to sort of offset each other. So on an all-in basis, they don't have any impact. But yes, we will continue to capitalize the interest that we have across the board for purposes of property, plant and equipment. That's what we will be doing.

The next question is from Jorge Beristain with Deutsche Bank.

Jorge Beristain with Deutsche Bank. Maybe again these questions are for Tony, but just trying to keep track of the charges here. And would there be any charge to expect in the fourth quarter results with the expected suspension of La Coipa? Or has that already been written down?

Yes. I think we've provided all of the details in the financial statements, Jorge, of the individual balances. And what we have on a go-forward basis is that there's a residual balance of goodwill for La Coipa, which is disclosed in the financial statements and that amount totals $124 million. But we have a longer-term plan for La Coipa and we're continuing to explore it. So I would expect that, subject to how we look at the plan and the fact that we'll continue to have reserves there, notwithstanding that we're not -- we're going to be putting the operation in suspension, I wouldn't to expect to see any impact in terms of an impairment of goodwill at the end of the fourth quarter. That's all prefaced, of course, by what happens with the gold prices. Important to understand that the impairment that we booked this quarter is largely due to the change in gold price. As you will know, because I'm sure you've looked through the details, our long-term price that we used at December was $1,500, not $1,300. So the lion's share of the impairment that came through relates solely to the gold price change. In addition, we had about $660 million of the impairment that related to goodwill, and the balance was in terms of property, plant and equipment. But now we have approximately $3 billion of property, plant and equipment that's being written down, which actually can be reversed back, subject to what happens in the gold prices. So hopefully we're going to see a rebound in prices and some of those amounts will come back when we look at our impairment testing in the future.

Great. And my other question was just related to Paracatu. If you could just give us an update as to what's happening there with the third ball mill. I noticed you did take a -- it looks like a goodwill write-down there but just give us an update on maybe the operations or maybe that's Brant's side?

Yes. What I would like to mention is that certainly, the team that we put in there is achieving very, very good results, beyond expectations. So from a continuous improvement process and the improvements both in the operation and costs there at Paracatu, I think have been very, very good. And we do -- as you know that we have completed the installation of both the third and the fourth ball mill and I would say that, that's going quite well. We are achieving expectations or exceeding expectations when it comes to throughput and recoveries. So my hat's off to the team there. They're doing a very, very good job. They've had a great quarter and a great year.

Sorry, are you operating all 4 ball mills right now?

We are. Correct.

I just wanted to follow up on that because I did -- I thought I'd heard that one of -- the fourth one could have been shut down as a way to run the operation more for cash flow. That's why I was asking.

And actually the performance of the ball mills and what we're getting and the performance of the SAG mill from the team that's in there currently does certainly require us to run all 4 ball mills.

There is a follow-up question from Brian Yu of Citi.

My question is again on Tasiast. I think you were emphatic on the call that no decision till at least 2015. Is there anything notable or that steered you towards that year in terms of timing?

Well, Brian, it's Paul here. Again, it's really sort of the tale of the gold price and, as we looked at the gold price, it led us, in the first instance, to have some discussions with our auditors about impairment testing. The gold price also led us to think about the balance sheet and liquidity. And given the high degree of volatility and uncertainty we've experienced recently, we chose to make the balance sheet a priority. And frankly, the decision to not make a decision is really the consequence, more than anything, of a focus on the balance sheet. It's nothing more than that. We're going to focus on the balance sheet and we're not even going to think about Tasiast until we -- and there are some operational sort of lead-up, ramp-up, ramp-down issues once we go in a certain direction that drive us to making the point that we wouldn't think about making a decision until 2015.

Okay. All right. I guess I was kind of what -- more the question was on the operations side. So it seems like just from a timing standpoint, you've got that, as you mentioned, ramp down and ramp up. That might be driving part of it?

Absolutely. Brant, I don't know if you want to elaborate there.

Yes. Certainly, from a standpoint -- we indicated that some of the things that we're looking at, considering the low gold price environment, on our Way Forward platform here is -- certainly we made the decision and we talked about the -- stopping the Piment strip this year and we're looking at slowing down the strip at West branch as part of some of the things that we're looking at in this low gold price environment. And in doing that, you suspend or delay equipment deliveries, as well. So to ramp down and then ramp that back up, there's just a real logistical thing that you have to consider when you do something like that. So that takes time. So you just don't do that overnight. So as Paul mentioned, that's probably a major part of that 1-year bill, just the process, the logistical process of ramping down then ramping back up. But I think it's important to recognize that, regardless of what the mining rate is and what we do under the Kinross Way Forward going forward, the decisions that we make in the strategic business planning process and the budgeting process, the West Branch, there's -- and Tasiast, there's 15 million ounces sitting there and we are going to make the right decisions to develop that in the right manner.

Okay. And Paul, big picture question. I know that a lot of you and your peers have been put on the defensive because of what's happened with the gold price. If gold just stays at the $1,300 level, what do you see as the offensive strategies that are available to the Company to try to grow, maybe not necessarily production but grow earnings somehow? I'm not really sure what the answer is.

Look, I think the key here for us is we have a strong balance sheet and we want to keep it that way. We've just come through a period of uncertainty. We think we've been decisive in responding to the uncertainty to focus on costs across the board. It's going to be a little bit iterative. We are, as I think Brant indicated earlier on the call, we're at the point in the year where we are actually -- in our cycle, we update our strategic business plans or we call it the life-of-mine plans. We're doing that right now in the context of the current gold price. That rolls directly into our budget cycle for October, November. So our strategy, we're focused on the business, as you can see quarter by quarter. We're making tough decisions. We're going to keep the balance sheet strong and we'll see what the universe is out there. If we are in a sustainable gold price environment then we want to be positioned -- we want to be coming from a position of strength in that environment.

This concludes the time we have allotted for questions on today's call.

Thank you, operator, and thanks again to everyone for joining us today, and we look forward to speaking to you in the next quarter. Thank you.