Q2 2020 Kinross Gold Corp Earnings Call
This time I would like to welcome everyone to the Kinross Gold Corp. second quarter Twentytwenty results conference call and webcast.
All participants are in they listen only mode to prevent any background noise.
After the speaker's remarks, there will be a question and answer session.
If you would like to ask a question during the session simply press Star then the number one on your telephone keypad.
If you would like to withdraw your question first the pokey.
Thank you at this time I'd like to turn the call over to Mr., Tom Elliott Senior Vice President Investor Relations and corporate development, Australia, you May begin your conference.
Thank you good morning.
Today, we have Paul Rollinson, President and CEO Kinross senior leadership team and refrigerant Baltimore is the Jeff gold.
Before we begin I'd like to bring to your attention to factor will be making forward looking statements. During this presentation.
For a complete discussion of the risks uncertainties assumptions, which may lead to actual results or performance being different from estimates contained in our fourth dimension. Please refer to page two of this presentation. Our news release dated July 29 to 2020 M. DNA for the period ended June Thirtyth 20 to 20.
And our most recently filed.
All of which are available on our website.
I'll now turn the call over the.
Thanks, Tom and thank you all for joining us today.
First and foremost I'd like to acknowledge and thank all of our hard working employees.
You have helped us deliver strong results.
While managing through their own unique challenges during those pandemic.
Safety of our employees and their families and communities that we operate.
Continues to be our first priority.
I also want to say that her thoughts are with all of those being affected by the pandemic.
[noise] Kinross delivered strong results in Q2.
We are pleased with the significant growth in margins earnings and free cash flow.
This morning, you will hear.
How our company is technically strong with an excellent operation operational track record.
Is managing the impacts from Cowen.
[music] is delivering very strong free cash flow would appear leading yield.
It has numerous projects to continue adding mine life.
In a number of exciting exploration opportunities.
Before that I will comment briefly on the corner and a few key developments Andrea will provide a financial review.
Baltimore, He will summarize our operating performance.
We will also give an update on how we're managing through the pandemic.
[music] all the company's operations performed well during the quarter.
Once again, though our three largest mice paracatu kupol.
And Josh Yes accounted for over 60% of total production.
<unk> delivered the lowest cost in the portfolio.
More than 50% of our production probably comes from the Americas U.S. in Brazil.
With the balance from Russia, and West Africa.
Over 80% about production comes from five key assets in five separate regions.
Our recent acquisition in Russia.
And taking into account our track record of exploration success.
We expect that these assets and regions will have mine lives of at least 10 years.
We also had another strong quarter in terms of free cash flow and generated approximately $220 million during Q2.
But current spot prices.
Cash flow is expected to remain very strong for the remainder of the year.
As a result for continued strong cash flow.
Our investment grade balance sheet strengthen further.
Okay, and we finished the quarter with just over $1.5 billion in cash.
Impart due to the draw on our revolver.
Andrea will comment further on the revolver. However, I would note that we get repaid 250 million of the facility subsequent to quarter Rad.
At this time, we're not formally reinstating our guidance.
But continue to work towards architectural targets for at least in February.
Our key results for the first half the year are tracking within the original guidance ranges.
Albeit at the low end of production due to some pandemic related impacts.
However, we.
We do continue to expect the second half for the year to be the stronger have for both production and cost.
During the quarter, we announced an agreement in principle with the government of Mauritania <unk> to enhance our partnership at Tas, Yes.
We are pleased to have been able to negotiate is mutually beneficial agreement with the government.
And add to our positive momentum kinda decade of success in the country.
And earlier this month, we released the Prefeasibility results on our Lobo Marte <unk> project in Chile.
This represents an excellent growth opportunity.
Although there's a large scale long life assets located in one of the world's top mining jurisdictions.
The PFS results show that it has the potential to support our long term production profile.
In increases both our reserves and reserve life index by 25%.
Compared with the end of 2019.
The project offers attractive returns and consensus long term estimates.
And by good grades a modest strip ratio.
Costs.
As we now move forward with the feasibility study, we will continue to prioritize balance sheet strength.
And disciplined capital allocation.
Any construction decision will not be made for a number of years until the feasibility study.
And permitting have been completed.
With respect to capital allocation [noise].
Our team has managed the company to a wide range of gold price environments.
And as always remain disciplined on costs and allocating capital.
Current gold and energy prices and FX rates are favorable.
And we expect to continue producing significant free cash flow over the coming years.
For example, if gold prices stay above $1800 for the remainder of the year, we would expect to generate over $900 million a free cash flow during 2020.
Over the coming months, we will continue to be discipline with respect to the use of our balance sheet, including.
Leveraging our strong technical expertise to uncover.
Attractive high return investments that makes sense for our business and our shareholders continue reducing debt maturities come up.
Moderate modestly increasing exploration spend to leverage our numerous prospects to potentially add houses and mine life.
And post cobot on certain D a potential return of capital.
Given our internal opportunities, we feel no pressure to make external investments of any short unless we are comfortable with the risk reward profile.
We also have several areas within our portfolio.
That may present attractive optionality for capitalizing on a high gold price.
Without risking significant capital.
And without altering the resiliency of our business.
Should prices declined in the future.
I'll now turn the call over to address for more detailed review of our financial results.
Thanks, Paul I'll begin with a few financial highlights from the quarter review capital expenditures and and with a summary of the balance sheet.
During Q2, we produced approximately 572000 attributable gold equivalent ounces and sold 584000 at an average cost to sell the $725 sprouts and it all in sustaining costs of $984 per out, we're particularly pleased with the cost performance, which came at the middle of our.
Original guidance range, despite cobot 19 related inefficiencies and challenges.
Our margins increased 53% to $987 per ounce outpacing the 31% increase in our average realized gold price of 1700 and $12 per hour.
We sold approximately 12000 ounces more than we produce including about 15000 ounces that where I'm sold at the end of Q1, partly offset by a Miss chip match ran out due to our transportation delay relating to bad weather. These ounces were sold in July.
Our adjusted EPS of 15 cents, an adjusted operating cash flow share of 33 cents were both up significantly compared with the second last year.
Adjusted operating cash flow increased to $417 million from $288 million last year and as Paul mentioned earlier free cash flow for the quarter was approximately $220 million, which is twice the level, we achieved in the first quarter.
We expect free cash flow to remain strong for the rest of the here.
Turning to income tax we recorded an expense of $103 million during the quarter compared to $47 million in the second quarter last year with the increased due to higher taxable income driven by higher realized gold price isn't higher margin.
Capital expenditures during the quarter were $214 million, which was slightly higher than hundred $91 million spent in Q1.
However, Q2, Capex was lower than planned due to covert related challenges.
As an example capitalized stripping for the task is 24 K project has been slower than planned due to constraints on the movement of personnel as well as the strike.
Our original guidance in February had 2020, capex of $900 million, plus or minus 5% with a reduction of approximately $100 million in 2021.
We still expect combined capex for the 2020 2021 timeframe to be in line with these original targets. However, the timing of spend it on specific projects maybe modified.
We've identified expenditures from 2020 that will likely not occur until 2021, and we've identified some expenditures originally planned for 2021 that had strong business cases to be brought forward to 2020.
Paul Tomorrow, we will provide some example, shortly however, the point I'd like to make is our overall capital needs are not changing materially and we have the flexibility to adjust the allocation of our spending in 2020 and 2021 as we adapt to the external environment.
We also expect some puts and takes on operating costs, including continued favorable foreign exchange rates on the Brazilian route and Russian ruble and lower energy prices.
Higher royalties, resulting from higher gold prices and of course potential impacts from any future operating challenges associated with covert 19.
With strong metal sales, a rising gold price and a 200 million dollar draw on the task is facility. We ended the quarter with just over $1.5 billion of cash and cash equivalent.
Including the task is facility and a $750 million drawn on the revolver total debt at June Thirtyth was $2.7 billion and not that with approximately $1.1 billion.
On a trailing 12 month basis, our net debt to EBITDA ratio improved once again, and it's now 0.7 times.
As Paul mentioned subsequent to the quarter and we repaid 250 million out of the 750 million drawn on the credit facility.
We made this partial repayment for two reasons.
Our cash balance continues to grow from the strong free cash flow. We're generating in fact, we have more cash now after the partial repayment then when we initially Jerome a facility in March.
And we're slightly more comfortable with the overall operating and financial environment globally.
Nonetheless, we're keeping the remaining $500 million drawn for the time being as the funds are relatively low cost.
And to ensure we can comfortably manage a wide range of potential risks.
In summary, we're comfortable with Kinross is liquidity position I believe we have a strong base to continue to find our business in the current environment.
I'll now turn the call over to Paul Tomorrow.
Thanks, very much Andrew.
First of all spend a few minutes on some of the Kiko would related topics and then I'll give a brief summary of our operations are doing.
Also discussing some very encouraging exploration highlights and comment on areas, where we continue to target meaningful mine life extensions.
And then I'll elaborate on capital expenditures.
[noise] broadly speaking our portfolio of operations managed very well through cobot 19, we acted early with our task forces took several important measures, which allowed us to minimize the impact to our business.
Today, we have not experienced any material negative impacts and remain on track to achieve our operating and perjured development targets.
That said, we've experienced some minor impacts.
On a trailing library to though to scruffy Joseph.
As Paul indicated or three big swings continue their strong performance and accounted for over 60% of second quarter production.
The combined cost of sales just below 600 lower sprouts.
Perks to was once again, our largest producer and continues to deliver strong consistent results.
Production increased by approximately 15000 ounces over last quarter.
Recoveries remained lower than last year, but are in line with or expectations and would present in the technical report.
They are expected to improve as we move into higher grade ore in late 2000 and early 21.
Strong throughput unfavorable currency exchange rates during the quarter resulted in lower unit cost, albeit slightly higher than the year ago quarter due to lower production.
Turning to Russia cool in des Moines, we delivered another excellent quarter and continue to generate robust cash flow good throughput grades and recoveries drove an increase in production by approximately 3000 10000 ounces.
Read through last year in last quarter, respectively.
Cash cost of just over $600 frowns improved from Q1, but increased slightly from Q2 2019 as result of high royalties associated with higher gold price and were partly offset by favorable currency.
Turn to exploration accruable, following an excellent year last year or team achieved one of the best first halves on record yielding very positive results within the mine footprint at Kupol from areas like the northeast extension Kupol D.. So we're Oscar Providence.
As anticipated many of these new potential mining zones are narrowing within those historically minded cool, but made possible. It cools ongoing successful transition to narrow vein mining.
Which should allow us to maintain diluted grades in the eight to nine gram per ton range.
Exploration will continue to focus on these targets as well as on proximal brownfield targets for the rest of 2020 with the expectation of once again, adding to the mines estimate in mineral reserves and resources with our year end.
With the addition of these ounces from the first half we expect to be mining at Kupol until at least 2025.
Further supporting our decades the success in Russia.
We remain very pleased with the results of the Kupol mine exploration program, which combined with the successful transition to narrow vein mining has continued to yield impressive additions to approvals mine life.
Our children, we intentionally slowed down or drilling in the second quarter to better manage covert protocols Mccann.
What are now in the process of ramping back up or exploration activities.
At the end of the second quarter, just over 35000 meters of infill step out and metallurgical drilling had been completed.
The results are encouraging and support our original thesis for the project, which has a large near surface estimate in mineral resource with highly continues mineralization and is open along strike and at that.
The drill program for the third quarters focus on further definition in the high grades on.
And we expect to complete this year as planned 55000 meter drilling program on schedule.
Moving to Tazeen.
Despite.
Pandemic related challenges relate to the mining rate and a 17 days strike and work stoppage has just had a good quarter operationally.
The mill delivered average throughput of approximately 60700 tonnes per day during todays it operated which was slightly higher than the record achieved in the first quarter.
However, strict cobot screening protocols have limited the workforce available and we have prioritized allocating can speak to those people who work in the middle and then the process are good.
As a result, we've had to curtail the mining rate.
In the second quarter times this might approximately seven in half million tons significantly lower than the 22 million times there were planned in the budget.
The principal impact of this result is a deferral of stripping time and the associated capital dollars and a commensurate delay in access to the ore from the West branch for pushed back.
Production is not expected to be impact in 2020, but the delay in access to new or in the longer than planned reliance on stockpiled will result in lower production and 2021.
Then had been compared in contemplated in the original 24 came mine plan.
However, we expect no impacts to tell just like mine production mineral reserve estimates were overall value as we were able to just short term mine plans given the availability of very large stockpiles at the site.
As for the construction project to continues to advance well.
Civil works are well advanced in the project remains on schedule to increase throughput capacity to 21000 tonnes per day by the end of 2021 and.
And then on we're just 24000 tonnes per day by mid 2023.
However, if pandemic related constraints in the global moving to people in supplies persist for a prolonged period of time the schedule could be negatively impacted.
However, I'm pleased to say by the end of June the company had reinstated the rotation of experienced stuff in and out of Mauritania, which has improved the situation.
Moving onto our U.S. operations are three sites continue to move closer to normal as we maintain discipline on pandemic related protocols and procedures.
I'd round mountain unit cost of sales increased slightly compared with last quarter and last year due to lower grades and recoveries as planned.
We expect production to increase in the second half the year, particularly in the fourth quarter.
Exploration drilling it round mountain continue to focus on the fees ex area, which is the conceptual name for the next major push back after phase there will be.
Drilling has intersected significant mineralization in the upper portions of the shallow section of the fees ex pit shell and confirmed that mineralization extends from phase W.
Further drilling will assess whether mineralization in the upper portions of Phasix could reduce the strip ratio.
We've also initiated early engineering works on what a phase ex pushback might look like.
Bald mountain production increased by approximately 15% compared with last quarter, and 20% compared with last year due to improved grades and recoveries from vantage.
However costs increased slightly compared last quarter due to an increase in operating waste mind.
At Fort Knox production costs, both improved compared with Q1 due to improved milled grade recovery and lower electricity costs.
Results at Fort Knox are becoming more reliable and we expect Q3 to further improve were results in the first half.
The Gilmore expansion project is advancing very well and the project remains firmly on timing on budget.
We're looking forward to stacking first or on the New Burns Creek heap Leach and completion of the project in the fourth quarter.
With phase W. Vantage Gilmore and now potentially Phasix, we're very pleased to be extending our time to mining friendly states of Alaska in Nevada.
In Washington State, we completed in the quarter, a high level engineering and economic assessment of the potential for mining at the Curlew basin at the historical K to mine, which is approximately 35 kilometers north of our Kettle River mill.
The results were encouraging and as a result, we've re initiated the rehabilitation and development of an advanced exploration decline.
To allow for underground drilling targeting incremental high margin ounces proximal to and as extensions of the key to and key five deposits.
Moving to garner at Chirano.
We experienced some unplanned downtime at the process plant due to issues with the front feet are thinking or the middle motor which negatively impacted production.
Then as Andrew mentioned, there were some untimely weather conditions that prevented a schedule shipment further impacting sales.
The plant issues have been resolved in the midst shipment has also been successfully completed.
Following successful near mine exploration expenses, a trend, though we expect meaningful mine life extensions.
The additional ounces are likely be slightly lower grade and then there were veins that could lead to slightly lower production levels and higher unit costs. However, most importantly, we expect these extensions to be economic and or 1200 or Brown's planning price.
Additionally, exploration program continues to yield positive results.
At the over deposit drilling in the first half 2020 yielded significant intercepts and and has extended the depth of high grade mineralization.
As a result, we have begun development work on an exploration drift a better truly need the potential for an underground mine it at overall.
Should this hypothesis play out we could see mine life extensions beyond 2025.
Moving to our Chilean projects look quite what continues to make efforts to offset some lost time due to pandemic related restrictions with good progress on hiring engineering and procurement.
Paul has already covered lower margin.
And finally as Andrea stated we are adjusting the timing of our capital program to capitalize on some valuable opportunities our teams have identified into comedy the various restrictions across our operations.
As mentioned some stripping at times this has been delayed and 2021.
However, as noted earlier the changes are not expected to impact the overall 24 key project timeline.
Some of these delayed expenditures will be offset as we bring forward other projects that add value such as the purchase of some input equipment up here.
That will allow for increased production sooner than initially planned.
Additionally, we plan to relocate the primary crusher round mountain in order to increase mill recovery and lower production costs.
To wrap up our priorities continue to be the health and safety of or employees as we managed to some ongoing pandemic strong consistent operating results and delivering or projects on time and on budget.
And with that I'll turn the call back over.
Thanks, Paul.
I want to reiterate our gratitude to our employees suppliers.
Communities and host governments that all continue to work together to keep everybody say from productive.
As a result of this hard work [noise].
All of our assets remain in operation.
And our projects continue to advance.
Notwithstanding covered.
Our business is very well positioned.
Our commodity prices and currencies are favorable.
We continue to extend our long term track record of strong and consistent performance across all of our geographies.
We have an attractive portfolio of operations projects and exploration opportunities.
And we continue growing our free cash flow and further strengthening our investment grade balance sheet.
With all this we are set to continue driving meaningful value creation and share price appreciation.
Coming quarters in years.
With that operator can we now please open up the call to questions.
Yes, Sir and once again, ladies and gentlemen, if you do have a question that as Saar than the number one on your telephone keypad. Once again, if you do have a question on the phone lines or the Star then the number one.
And we'll pause for just one moment to call the Kuni roster.
And your first question comes from line of Ralph Profiti know that with the eight capital.
Good morning, Thanks, everyone for taking my questions.
Firstly, Paul on cost a 24 Kay.
Can you maybe disclose how much of a workforce is needed a C at a minimum.
The on schedule when it comes to construction.
Maybe sort of where are you now and how does that work force me to build up overtime.
There's many aspects to it so within the project there are different scope elements. One very large element of scope is the power plant and that's probably requires the single largest number of people. We've delayed that project deliberately it's not critical path, it's not required to get us 21 k.
Okay, and so we push that out a couple of months primarily to save space in the camp.
In general, we're not particularly worried about being able to ramp up the number of people there they're relatively small scopes of work the b the bigger.
You space and the camp isn't a isn't the mining fleet and that's where we've seen the delay in the stripping as result of.
Having fewer people in mind.
I'll remind you. The 24 key project is a series of pretty small scopes of work thickener, while our our water.
Upgrade so we were able to manage those sequentially.
Okay.
Thanks for that.
If we back and switch gears and maybe asking a question.
And a lot count section that you provided it does show sort of these higher grade near surface and I'm. Just wondering when it comes to drilling are you more concentrated sort of along strike as a strategy.
Finding continuity and at a higher grade near surface elements of how this ore bodies coming together.
So we remain very happy with what's going on should look on the first half of the year was focused on just continue the continued program as I said, we did about 35000 meters.
The focus to date has been just that infill program and establishing better confidence in our initial hypothesis. The high grade portions. We we are excited by that whole, but we haven't.
Spent a lot of time in the first half doing testing on that that will be part of our program in the second half. So I don't want to got comment too much right now on further high grades until we are able to get into our second half program.
Yes, it's really just filling out exactly we we've really been.
We've really been focused on infilling getting a better a better set of data for the resource model that is being built right now we.
We are excited by the high grades, but we're going to be getting into that in the second quarter to see if theres continuity in more of it.
And the reason that's in the third quarters, we wanted to get the structural geology part correct. So could have the best chance of success and efficient spending a doors.
Yeah, that's understood thanks for the clarity.
And your next question comes from the line of Greg Barnes with TD Securities.
Yes, Thank you expect to pull to more again on the 2021.
Production levels at task. So you said will be down modestly from UBS and the type curve.
I'm just wondering what modest is.
The 40 to 60000 ounces at our current view, we're still refining the mine plan. There's a couple of variables that have yet to settle one is.
How quickly when can we ramped the mining rate backdrop. So the mining rate now is is increasing so every week, we mine more than the previous week.
However, cobot related impacts remain in a in is primarily quarantine related in the number of people wouldn't happen to camp there.
The Covance situation ties uses is continually improving so the uncertainty is really how quickly can ramp back up to planned rates, but at our first blush like I said 40 to 60000 ounces less than the TR and that's primarily that's almost exclusively grade driven.
And switching back to Paul Rollinson, Paul Your comments at the end of your opening statement about.
Hi, I Miss it a little bit that something to do what do you have internal opportunities that you can.
Bring forward or potentially monetize I think is what you're trying again.
Well I think I'd, just again I think this quarter in particular.
Versus other years.
We're pretty excited on the exploration side, we've got a lot to new stuff, we had some great drilling in the first half of the year Paul touched on the success of Taranto, where we're very excited about currently.
There's there's that aspect to it the other side of it that I kind of alluded to was.
As you know, we do our budgeting and our reserves that 1200.
And there is flex obviously in the revenue line.
Were you know if a project where to Green light with your 1200 dollar hurdle.
You can you see a lot of Optionality or are you know NPV expansion at higher commodity prices.
Without incurring incremental capital.
Mike and what I was trying to say was you know should commodity prices go back down.
We still have positive cash flow positive IR, but we're going to get the benefit.
Of higher commodity prices.
Building add to 1200 dollar threshold.
Gotcha Okay.
Finally coal and dividend.
No you would think cautious around covered 19, and it's unclear what the impact will look like over the next six to 12 months, but.
You are generating a lot of free cash flow I know people interact pipeline, but clearly that's something I think.
Investors would like to see return.
Yeah, Okay, absolutely and we get it I think Greg we were.
We were getting questions on return of capital in January February based on what the expectation of the two years cash flow. The year ahead cashflow would be.
Covered kind of put everything in the backseat, what we said on our previous call was it feels to us a little bit incurring druon.
To be reinstating, our initiating a dividend when we've just strong 750 million.
Under our revolver to put cash on our balance sheet.
Just two for business on certainty I.
I think the point, we're trying to make here today as.
Well not out of the woods, yet, but the signaling by paying back that first tranche of 250.
Of the 750, I think should be taken as a positive signal.
You know, our but we are being impacted by coven.
We are managing through it.
But we can't say for certain that we're we're out of it we're through it.
I am optimistic, though as we continue here.
We will work through it and and as I would've said in and maybe in January.
It's really not a question on if it's a question of win.
We are probably a bit on the conservative side, but we are getting stronger financially every month every quarter and my hope.
There's no guarantees in life. My hope is as we continue to get stronger and we moved into the fall.
And we work through all of this.
We're going to be well positioned for that return of capital discussion.
Great. Thanks, that's helpful.
And your next question comes from line of Josh Wolfson with RBC capital markets.
And Josh your line is open.
Sorry, noting the commentary in the release and are on the conference call related to the Kupol exploration results.
You know you gave some sort of commentary about how are the magnitude of potential upside. It at Taranto is there any sort of.
Back to achieve could tell us or what that exploration upside could be FERC for cool.
Well I mean, I think what Paul said, which I think is really exciting for US last year was one of the best years ever.
In terms of.
Reserve replacement at Kupol.
I think the point he was making this year and I'll, let him expand is.
We've actually been delayed in our spending at Kupol This year and so we're behind where we would be.
But notwithstanding that we've had the best year ever.
So we're feeling really really good about.
Going from an exploration point of view it at Kupol and.
On the spot, but I do think he didn't make the comment about.
At this stage, we're feeling comfortable about again extending mine life.
It's Josh as you can appreciate is difficult to put quantum's out there, but rather how would I say this.
The 2025 mine life extension, we're feeling really good about we got to do some I dotting t. crossing on that in the next few months and you'll see the reserve update at the end of the year, but we're feeling.
Pretty good about that 2025.
And as usual you've watched kubel for many years now we have a very strong record of continuing to add reserves and replace that which we produced.
I don't think it's going to end in 2025, we have a lot of targets. We continue to drill we can do you spent a lot of money. The returns are good and so I'm not going to put a quantum out there, but we're feeling very encouraged by what we're seeing a cool I mean, just talk a little bit they'll what is happening there the big.
The big wide zones at good high grades are largely depleted, but we're getting some very encouraging there really the hard to this exploration success. It's finding these narrower veins with very high grades in some cases 2030 grams now the wits or one meters. So you got to dilute those.
And originally our worry was that the grades wouldn't be high enough in the with two narrowed to support.
The scale, the Kubel operation, but Fortunately with this very successful ongoing transitions narrower vein mining.
We think we're going to be able to maintain the dilute agreed in that eight to nine range and to continue to extend mine life. So really what the big encouraging thing is that we're getting good grades and those veins really high grades there narrow and.
We were able to successfully mine them. So we're feeling really good about what we're seeing at Kupol and to give you a perspective, a couple of years ago, we had almost no narrow veins inactive mining our plan right now over the next three four years his transition to three quarters of our production come from narrow veins and it's a it's a phased transition over three four years were switching the equipment over.
Were our workforce is getting used to the narrow vein. So it's a it's a nice it's not an overnight transition at something phased in over three four years. So were <unk> what else is we're feeling really good about Google.
Got it okay.
And then contained in the conversation on the a return to capital commentary.
You know, noting where gold prices are today and for cats free cash flow being very high.
But also you know looking at the portfolio projects and wanting to maintain some conservatism, what's what's the right approach or rate numbers I'll ask again specifics if that's possible.
That would make that number or sort of relevant but still.
Still.
Not too aggressive.
Yeah look I think I don't.
The way we come at it the way, we think about the allocation of capital really and I would have said this again maybe back in January we we sort of triangulate around a few considerations. One is obviously the gold price.
The other is our balance sheet.
And the third would be just the the capital.
Opportunities in our business.
And you know.
Check on the gold price.
Check on the balance sheet.
And for Us quite frankly, just to digress lately.
We feel really good I mean, we as you know have come through.
Period of significant reinvestment.
In our business over the last three years.
And when we did put out our guidance originally back in mid February we tried to give a look through.
To 21 22 at least as it relates to capital investing back in the business and what we were projecting is as we're coming out of that reinvestment period of 900 million plus or minus capital.
Going down into sort of the 800 and down going forward and so we were advertising back in February.
All in cash flow as a result or is the result of less capital on expanded margins.
All of that is is you know content remains true and we feel stronger about its an ever.
It's just we can't predict as I've said, we have been impacted a lot of it Paul Moriah spoken about.
With respect to covered we are managing through it and it just seems prudent do wise.
To do you just you know given a couple more months here.
To see how we go.
[music].
So I think you know from one from what is that if you're asking me what is the right sort of dividend if if hasn't when we get there will.
Well look at what's out there will benchmark off of our peers and our and our comps.
And what I've also said is for US I think you know the signal would be keep an eye on you know there's a sequence to me that makes a lot of sense here.
And as I said, we just made an initial 250 out of the Sevenfifty repayment on the revolver.
I think the signal I'd be looking for as when we do repaid the balance of that revolver.
That's going to signal our comfort about the covered risk going forward.
And I suspect the minute, we do repay that revolver, we'll get an immediate question on a guidance reset.
And the return of capital and I'd like to believe you know if everything holds together.
That's a conversation will be having in the fall.
Okay, maybe they just to sort of clarify you mentioned sort of benchmarking it.
No one approach I guess is looking at.
Yields perhaps for peers.
But I guess I would note that most of the peer group I guess is trying to.
Determine their payout levels based off significantly lower coal prices, which presumably would affect what your levels would be as well is that how you would look at things to or you are you more comfortable I guess using higher pay us maybe based on the current environment.
Yes, Josh I think.
We are inherently conservative I mean I think.
Someone Hercules maybe were too conservative.
We're going to be the same when we think about yes, we're gonna be reasonable and we're going to be appropriate.
We still budget at 1200, we still do our reserves at 1200.
And we will you know contemplate when when we do get into that situation as you well appreciate you don't want to be adjusting their.
Turning a dividend on turning it off we want to find the right level, that's sustainable for the long term.
And I.
I will adjust carefully as we go forward.
Great. Thank you.
Thanks.
And once again, ladies and gentlemen, if you do have a question that has started the number one on your telephone keypad.
And your next question comes from lineup carries Macquarie with Canaccord Genuity.
Good morning, everyone. Just maybe another question purple tomorrow, yet on Fort Knox.
Your cash costs, there have been averaging $1200 an ounce I know, there's a pit wall slide a few years back or your locker. So I'm just wondering with Gilmore set for completion in Q4, just how we should think about Fort Knox going into 2021 from a production cost standpoint.
Yeah, you quite correctly pointed out Fort Knox has had a bit of rough covert over the last few quarters, but we're coming out of it the the assets doing very well right now and we expect.
Production to start ramping up your quarter by quarter to fall in line with a with what's in the technical report.
Yeah. That's it it's we're feeling a lot better but performance of were Knox.
So from what I recall month I can report I think cash costs were somewhere around maybe like 800, $900 announces that still what you're expecting.
It depends on the year of course, it will be.
Correlated to production I or the production to the lower the cash cost.
But in aggregate over the life of mine that's correct.
Great and then maybe just some as these acts that round mountain do you have resources resource ounces in that phase or is this a new.
So the yeah, there's a big chunk of am I and I add round mountain a lot about isn't phase X.
And you will recall when we did fees W.
We planned and designed all of the infrastructure the situation of the truck shops, the crusher relocations and all that we designed it to accommodate will recalling at that time W. Two and we just rebranded that act. So this would be the next major pushed back for which most of the capital other than the stripping has already been spend it's just a little.
Deeper, but what's really significant in this last quarter is that we're starting to find mineralization in the upper portions of X and that the reason we're really encouraged about that is of course that would reduce the strip ratio and potentially bring a 1200 dollar pit shell into site, we're not quite there yet, but it's moving in that direction. So a lot of the inventory we have currently and then mine.
Hi isn't acts.
Well I'm talking around there's another phase there called S. Slightly smaller there were also working on so there's a couple of potential mine life extensions a that we're working on at round and for the most part those ounces or in our resource inventory.
Some really Andrew roughly speaking.
Yeah, just wondering like the quantum of ounces are we talking like the earnings announcement.
Its you know reserves there like I mean that ex push back with US. We're we're hoping to get about a million ounces, there millions to a million and a half ounces, but.
It's it's still very conceptual it's early days and a I don't want to get ahead of myself on it but that's conceptually what we're looking at.
That's fair then maybe just back on chip that can given the expiration you're doing there this year.
Should we expect the expecting a resource update next year or is that too soon there okay.
Oh, we intend to update the resource model this year and so there will be a resource update with our year end.
Okay perfect. Thank you.
[noise] [noise] and your next question comes from line of Tanya Jakusconek with Scotia capital.
Hi, Good morning, everybody I'm, sorry, I just wanted to come back to that's capital allocation, Paul I'm forgot I understand that correctly and maybe another way to ask you.
Sam what minimum cash Oh, you're going to be comfortable holding on the balance sheet to run your business. So that we can kind of benchmark that 10 looking at excess cash flow going not to dividend payments and running your business. Thanks.
Sure I mean, there's cash on there.
[music].
Total debt.
And just.
Balance sheet metrics, if you will.
From a running the business point of view, we get that question from time to time and.
I would say generally our answers being sort of from the day to day running of our business, we want sort of minimum 350 to 500 of cash on the balance sheet.
What we're really talking about here, though is just uncertainty and that is why we put our guidance.
Just uncertainty and yeah, we feel better today at the end of July than we did in mid March having worked through this thus far and certainly as you know.
With this kind of spot environment.
As I alluded to in my opening remarks, if you extrapolate the spot environment to year end.
You know I, if I were sort of doing a back in the envelope I project, our net debt to EBITDA is probably down in.
I'll call lets say 0.3 kind of range from 0.7 today, So everything is headed into right direction.
And I for US, it's really just you know, making sure that as Paul alluded to we you know and maybe I'll, let him speak a little bit more specifically to task yes.
What we're finding is a as we're testing employees.
Most of them are asymptomatic and they get on the bus to go to the site.
And we find out their positive and we have to quarantine.
And so it's it's those kinds of headwinds and what we've been concerned about for example is just sheer head count in in for example, the mill.
And until we can kind of comfortably say, we're through all of that.
We're not going and again I would say, we're not it's a situation where you.
The mill.
Hasn't been impacted yet, but we need to know that we're likely not going to be impacted before our uncertainty level comes down we've been very fortunate in Brazil, so far.
Where you know, Brazil as a country has been making a lot of headlines on how they've been dealing with covance.
We've been well ahead of it with our protocols, but.
Having said that in the state of the Minister IRI and in.
In the city of Parakhin too we are seeing some upticks in covert cases.
So that's our point here, it's really not so much about the cash and the balance sheet I think we're in great shape today, we're getting stronger it's really just about the uncertainty of business impact before we get there.
Okay. So no whatever you know the gold prices the gold price and you will generate that amount of cash flow as long as you see a a workable environment going forward.
They post co that and you kind of run your your your because that's where the minimum at that 350 to 500 million.
On cash on the balance sheet <unk> you know you have you.
Sustaining capital your development capital, Thank everyone debt repayment in September of next year, but anything about them beyond.
Would be content to the training Sheldon.
Yes, that's right I think as I said earlier, you know, we triangulate around the free considerations of gold price balance sheet, and internal capital opportunities and and I think all three of those were it not for Covanta are are probably greenlight.
Okay.
And maybe just a question for Paul Paul Pete I'm just.
And I go for like basis, I'm, just trying to understand what thoughts on costs are now specking when it's cold stacked up five it doesn't matter.
Well actually I'll, just like that the Andrea we've got some pretty specific numbers on that.
Well you would've seen in our disclosure that we hot we get classify some cost in our operating cost, yes, yeah, they get bigger buckets being in Russia and that task. Yes. Then you know obviously, though there are two of those are both camp a base site.
<unk> in Russia had more.
More specifically sort of direct compensation related costs to pay people more that were at Sam that were at site for extended periods of time, probably saw that peak in Q2. So yeah, we'll have some of that going forward, but not to the same accent and not Cassius Cassius.
In total is about 10 million of that other operating.
Six of that was related to the strike and and for related to co that and in both of those buckets are what we refer to as abnormal more abnormal cost. So I'm just as a result as production not being not being at normal levels.
No.
I'm sorry, I was just wondering more going forward that there's going to be now with that.
I'll transportation there is a yeah, they're testing.
Additional P.P. acne. These aren't costs that were gonna have to take on now find the business going forward that until we get vaccination somewhat should we think that was ongoing costs to be and why are you going to allocate them and your cost structure or are there.
Okay. So I'll talk about what we expect continuing that Andrew will talk about the accounting so the by far the biggest component those costs are the camp.
Costs and the associated overtime payments based movies, we bring people want to say two weeks early they sit around and cap and you pay them. So you are consuming space in the cabin your Pete paying people overtime. So that's the by far the largest component of that cost.
That is an ongoing situation a coupon to voin at Kupol Dvoinoye enterprises to into a much lesser extent Taranto.
I don't see that going away anytime soon it made it may decline a little bit at Tasiast, but I don't see going away Kubel, we put everybody into quarantine going at Kupol. So you can keep the site completely a clean so I would expect to that continues through this quarter and into the fourth quarter attaches it'll go down as the.
The covert situation for US attendees has crescent were on the down slope I would expect there it to go down a little bit but.
I see these costs hanging around in the next couple of quarters.
That's for accounting, Andrew Yeah, I mean, you own <unk> as you would have seen any other operating costs.
There's not really anything overly significant atlas and if any of the other side.
And you know there item that items that like what you like what you have and Paul referred to so we'd expect those to those to continue but again you know the two significant area there really task in Russia as possible Kim.
So not significant other sites basically.
Okay.
Okay. Thanks.
Thank you.
And once again, ladies and gentlemen, if you do have a question let a star then they number one on your telephone keypad.
And it looks like we have no further questions at this time.
Okay. Thank you. Thank you operator, thanks, everyone for joining the call today, and we look forward to catching up well in the coming weeks and months. Thanks, everyone.
And this concludes todays conference call. Thank you for your participation you may now disconnect.
[music].