Q2 2019 Earnings Call
Simply press Star then the number one on your telephone keypad. If you would like to withdraw your question. Please press the pound key. Thank you at this time I would like to turn the call over to Mr. Tom Elliott Senior Vice President Investor Relations and corporate development. Mr. Elliott you may begin your conference.
Thank you and good morning.
With us today, we have all four members of our senior leadership team, namely Paul Rollinson, Andrea <unk>, Paul Tomorrow, and Jeff Goldblum.
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 results and performance being different from estimates contained in our forward looking information.
Please refer to page two of this presentation.
Our news releases dated July 31 2019.
The MD&A for the period ended June 32019.
And our most recently filed Aif all of which are available on that site.
I'll now turn the call over to Paul.
Thanks, Tom and thank you.
Today.
As you will have seen in our news releases last night.
In addition to our second quarter results.
Announced an agreement to purchase a high quality development project.
The far east of Russia.
Complementing the excellent business that we have had for many years in that region.
Okay.
I'm excited to share with you the details of this transaction at the end of my remarks, but first.
We will be providing an overview of our second quarter results.
So turning now to the results I am pleased to say that.
And that with strong production and excellent cost performance across our portfolio during the first half of the year.
We are on track to meet our 2019 guidance targets for production.
Cost and capital expenditures.
Paul Tomorrow, we will have more details on our operations and project, but I would like to highlight the continued strong performance of our three largest operations in <unk>.
<unk> <unk> and Tasiast, which also delivered the lowest costs in our portfolio.
Together in the first six months of the year, they produced over 60% of our total ounces.
At an average cost of sales of just over $600 per ounce.
<unk> achieved particularly impressive results.
Marking the third consecutive quarter of record production.
And the fifth consecutive quarter of declining costs.
The combined coupon <unk> operation maintained its long track record of consistent high performance.
And at Tasiast throughput continues to average well above expectations and costs continue to trend lower make.
Making this the third consecutive quarter Tasiast has reduced its costs.
In short Tasiast is making great progress can.
In becoming a large low cost producer.
Also at Tasiast.
We are continuing to advance our evaluation of lower capital alternatives for increasing throughput.
We continue to believe that the outperformance of the mill has created the opportunity to.
Two increase throughput to above 20000 tonnes per day.
While achieving substantial capital savings and enhanced economics.
We look forward to completing this work and plan to share the results with you.
Mid September.
At the same time, we continue to make progress in advancing the Tasiast project financing with the IFC EDC and two commercial banks and continue to target completion later this year.
Andrea will have further details for you in a moment.
And as many of you are aware the presidential election occurred in Mauritania near the end of June .
We do plan to engage with the new government following the president's imminent inauguration and the subsequent establishment.
From a new cabinet later in August .
So turning to our development projects, where we continue to make good progress.
Over the past two years, we have been leveraging our financial strength to reinvest in our business and have steadily progressed our pipeline of opportunities.
Our our two projects in Nevada Phase W and vantage are progressing well and both achieved a significant milestone during the quarter.
In late May Phase W. Poured first gold from the project, which was then followed by the first gold pour for vantage at the end of June .
At the Gilmore project heap Leach construction is advancing well and we are on track to begin stripping in the third quarter.
And finally, we are also making progress advancing the next set of opportunities to add to our pipeline spill.
Specifically our projects in Chile.
We completed the Lobo Marte scoping study earlier this year with promising results.
And remain on track to complete the La Coipa feasibility study in the third quarter.
To wrap up.
Our mines generated strong results in the first half of the year positioning us well for the balance of 2019.
We are on track to meet our full year guidance.
And we are making good progress in advancing our development pipeline.
I'll now turn the call over to Andrea for a review of our financial results.
Thanks, Paul.
I'll begin with a few financial highlights from the quarter increase.
Increased production and improved cost performance combined to deliver strong financial results in the second quarter.
Our global portfolio produced approximately 648000 ounces with an average cost of sales of $663 per ounce and an all in sustaining cost of $925 per ounce.
We sold 12000 fewer ounces than we produced in the quarter largely due to the timing of sales at Bald mountain.
We generated approximately $288 million and adjusted operating cash flow, which is a $56 million increase over the same period last year.
This is largely due to higher margins as our attributable margin per ounce sold increased by approximately 20% compared to the same period last year.
During the quarter, we realized an average gold price of $1307 per ounce, which is in line with the same period last year.
Prevailing gold prices and other key commodity and currency rates have performed favorably compared to our budget assumptions for the year.
We also continue to look for opportunities to lock in favorable FX rates and other inputs with our hedging program, which positions us well in the current environment.
Adjusted net earnings were $80 million for the quarter or <unk> <unk> per share compared with $38 million or <unk> <unk> per share for the second quarter of 2018.
Net earnings were $72 million compared with $2 4 million.
In Q2 of last year.
The increase was primarily the result of higher operating earnings partially offset by an increase in income tax expense.
Continuing with tax we received a $66 million A&P refund in Q2, resulting from the 2017 U S tax reform legislation.
We expect to receive subsequent refunds in decreasing amounts over the next three years.
Turning to our outlook for the remainder of the year. We are on track to deliver on our 2019 guidance for production cost of sales all in sustaining costs and capital.
We have made one minor guidance adjustment DD&A for the first half of the year of approximately $276 per ounce was below our full year guidance of $330 per ounce largely due to production mix.
As a result, we have reduced our DD&A guidance to $300 per ounce for 2019.
I would also like to note a few seasonal items that we expect to impact cash flow in the third quarter.
The second of our semiannual interest payments.
Increased working capital related to our supplies purchasing campaign in Russia.
And an increase in capital expenditures in particular sustaining capital, which is expected to peak in the third quarter.
In addition to our financial results I'd like to highlight two financing items that we progressed during the quarter, namely the Tasiast project financing and the extension of our revolving credit facility.
First as Paul noted, we've continued to advance the $300 million project financing that we're targeting for Tasiast with participation from the IFC EDC and two commercial banks.
We continue to target completion later this year with final due diligence activities advancing well and work now focused on completing the details of the loan documentation.
Second in July we extended the maturity date of our $1 5 billion revolving credit facility by one year to 2024.
Looking at our balance sheet, we continue to maintain a strong liquidity position with available liquidity of $1 9 billion and no debt maturities until 2021.
We have the financial flexibility to invest in our capital priorities as we complete our current cycle of development project.
I'll now turn the call over to Paul Tomorrow for a review of our operations and development project.
Thanks Andrea.
Are you walking you through some of the key highlights of our global portfolio touching on both operating performance and project updates.
I'll start with <unk>, which as Paul noted had a particularly impressive second quarter.
Production increased by almost 40000 ounces compared to the first quarter, while cost declined by $75 an ounce.
On our last call I outlined several factors that are driving per produced strong performance and these include results of the asset optimization work, which we completed last year benefiting throughput and recovery.
Continuous improvement efforts.
And enhancements made to mine infrastructure.
Perfect.
In addition to these measures which continue to contribute to strong performance. <unk> has also benefited from strong grades this past quarter as we were mining in the high grade portion of the ore body as had been anticipated in the mine plan.
As I've stated in the past there is some variability with Europe here too and in July mining transition to a lower grade phase of the pit.
Overall, we're extremely pleased with <unk> performance.
2019 to be a strong year for the operation.
Turning to Tasiast throughput.
Throughput continues to outperform our original expectations.
Combination of higher than anticipated mill throughput and recovery resulted in approximately 93000 ounces of production.
This is slightly lower than Q1, largely due to planned lower grades, which we expect to improve for the balance of the year.
We're also making good progress on the cost side.
<unk> by $4, an ounce compared to Q1, largely as a result of a focus on operating efficiencies and also lower operating waste mined.
Our project team is making great progress on the study of throughput alternatives in order to assess the most capital efficient next step for Tasiast and we are targeting sharing the results in mid September .
Moving on to our mines in Russia.
<unk> continued to be consistent low cost producers with cost of sales decreasing in the second quarter by $36 per ounce compared to the previous quarter.
Production at <unk> Zone, one began in the second quarter as planned.
We continue to prioritize exploration activities at our Russian mines at <unk>. For example, our efforts in the first half were focused on zone 37, West and results to date have been encouraging.
At <unk>, our work has been focused in a few different high potential areas.
<unk> main and hanging wall zone, where results continue to be positive Big Bend area, where drilling has continued to intercept significant grade and at the North extension, where we are seeing grades higher than previously modeled.
We plan to continue to test targets at both coupons of oil in the second half with a goal of adding to the operation's estimated mineral reserves and resources with our year end results.
Okay.
Turning now to our mines in Nevada round mountain performed well during the second quarter as production improved due to an increase in heap leach ounces.
We offset by lower mill grades costs were largely in line with the first quarter.
We are making excellent progress with phase W. We began commissioning of the processing circuit ahead of schedule in the first quarter and the vertical carbon in column plant is now complete and operational and as Paul mentioned, we've poured our first gold from <unk> in late May.
Mine infrastructure, including the truck shop warehouse Wash Bay and fuel Island.
Ultimately, 95% complete and expected to be fully commissioned in the third quarter.
Stripping is running slightly ahead of schedule and budget and we have encountered initial ore in portions of the phase W footprint and stripping is expected to continue into late 2020 as per the project feasibility study plan.
The vantage project at Bald Mountain is also well advanced and we began commissioning the processing circuit as planned in the first quarter <unk>.
The <unk> plant and heap Leach pad are now substantially complete and in production.
The project achieved its first gold pour in late June .
Construction of supporting infrastructure truck shop warehouse Wash Bay are also close to completion.
In terms of balls quarterly performance.
Q2 production was lower quarter over quarter.
Largely due to the effectively less ore placed on the pads and a decrease in mining activities.
The site experienced unusually severe weather during the first half of the year.
Preliminary in particular, which challenged both balls operational performance and construction of the vantage project.
While the ramp up has been slower than anticipated and is expected to impact both production and costs for the year, we expect mining activities and quarterly production to improve in the second half.
On the exploration front at Bald work in the first half of the year returned promising results at Redbird, including high grade intercepts adjacent to the current Redbird Redbird resource shell.
In the second half we plan further work, including testing the high grade mineralization, along the northeast trend and southeast expansion.
Moving on to our Fort Knox mine in Alaska performance improved as planned in the second quarter with better production and costs compared with Q1 <unk>.
However, weather related conditions impacted geotechnical stability in the northwest section of the pit in the second quarter.
And as a result, we've had to do some additional step out mining and expect some deferral of production.
However, neither the life of mine production or the Gilmore project have been impacted with the latter proceeding on budget and on schedule and construction of new heap Leach pad is underway and we've made great progress laying the impermeable liner.
Dewatering for the pit layback is proceeding according to plan.
We are on schedule to commence stripping in the third quarter and now expect to encounter initial Gilmore ore later this year approximately one quarter ahead of plan.
Finally to turn to our project in Chile as Paul mentioned, we are on track to complete the la Coipa Fs in the third quarter.
Following encouraging scoping study results were lower marketing, we've advanced the project to PFS, which should we expect to complete in mid 2020.
Both studies are assessing the degree to which resources such as personnel water energy and capital equipment can be shared and leveraged for synergies and efficiencies between the two potential projects.
To wrap up our priorities continue to be maintaining our excellent safety record delivering strong consistent operating results managing our costs and delivering our project on time and on budget.
And with that I'll turn it back to Paul.
Thanks, Paul.
I'm now pleased to share with you the details of our agreement to acquire 100% of the <unk> development project.
The transaction involves total consideration of $283 million over two years.
Comprised of 40% cash and 60% shares.
Upside payments in the form of a one 5% royalty and.
In a 50 $50 per ounce payment for potential reserve additions beyond.
Three to 5 million ounces of <unk> are also included in the consideration.
And highlight the expectation from both parties that this asset has the potential for substantial growth.
This is this is a really exciting opportunity where we have spent the past 16 months.
Completing a significant amount of due diligence including <unk>.
Several site visits.
And eight hole confirmatory drill program.
And a met testing program that confirmed favorable characteristics and recoveries.
And I would point out that throughout our drilling and met testing programs. We maintained a strict chain of custody to ensure sample validity during the due diligence process.
We see four strategic reasons why this is the right acquisition for Kinross.
First.
This is a high quality development project with strong upside potential.
<unk> has a large resource estimate of approximately 4 million ounces.
And as a relatively high grade near surface low strip open pit heap Leach bold deposit.
The project already has the potential to be a substantial producer with an attractive cost structure.
Based on our initial work, we estimate that <unk> could produce one 8 million ounces over a six year mine life.
With first quartile all in sustaining costs in the $550 per ounce range.
In addition, there is significant upside potential beyond the 4 million ounce resource estimate as the deposit is highly continuous and is open along strike and adapt.
There are also multiple untested high quality targets within the 120 square kilometer exploration license.
Second <unk>.
This project Leverages, our experience as world class as a world class operator of open pit cold climate heap leaches.
Third.
It builds on our existing regional platform.
<unk> is expected to enhance longer term production and cash flow in Russia.
We have a long history of operating successfully in country, having owned and operated four mines over the past 24 years.
And with that comes a well established team in the region.
Our robust robust network of suppliers and country and strong relationships with several Russian stakeholders.
Additionally, however ask where the project is located is a mining friendly jurisdiction.
And the fourth largest gold producing region in Russia.
Our business in Russia is run out of our Magadan office, which is located roughly equidistant between our existing operations and this new development project.
And lastly, the project is well aligned with our project pipeline and capital priorities.
We plan to undertake an extensive drilling program with the goal of further increasing the resource estimates with a view to completing pre fees and feasibility studies within the next three years.
We are targeting a two year construction period with a current estimate of initial capital expenditures of approximately $500 million.
Overall, we believe this opportunity is an excellent fit for Kinross.
And we are pleased to be adding a high quality project to our development pipeline.
Turning back to our performance for the first half of the year to wrap up.
Our portfolio of eight operations are performing well.
We remain in a strong financial position.
Our project and development pipeline is advancing well.
With that operator.
Can we please open up the line for questions. Thank you.
Thank you very much and just a reminder, in order to ask a question simply press Star then the number one on your telephone keypad, Ken that as Star then the number one on your telephone keypad. If you would like to ask a question, we'll pause for just a moment, while we compile the Q&A roster.
Okay.
Okay and our first question comes from the line of Stephen Walker of RBC Capital Markets Go ahead. Your line is open.
Alright, Thank you very much.
Paul just a question on <unk>.
I guess two parts the first part.
Is the subsurface mineral act do you need permission from the resource Ministry to own 100%.
Or does that.
<unk> automatically with the transaction and then secondly can you talk a little bit about the infrastructure.
Road access River access.
Access from existing operations.
Just to add a bit more on the infrastructure.
Sure look at thank you Steven good question.
We did have some disclosure around that subsurface.
And what we think might be required in terms of approvals, but maybe I'll give geoff an opportunity data response. Thanks, Paul Yes, Steven look maybe just a little bit of context.
Basically.
Under a literal interpretation of the law strategic approval for the project is not required.
Because the current registered resource with the authorities of 1 million ounces does not exceed the strategic 50 tonne threshold. However, you would have seen in our press release and as Paul has alluded to that we do have our own estimate of $3 9 million ounces that does exceed the threshold.
As a result, what we're what we're doing is seeking.
Seeking guidance from the authorities on whether strategic approval is required.
It is.
We would we would make the filing and we would expect to receive that approval in six to eight months.
Just for context, we have successfully filed two applications in the past and we're pretty comfortable with this one.
We plan on maintaining good relationships with the authorities great. Thanks, Jeff and Paul maybe you can speak a little bit too.
Infrastructure access right. So the area as Paul mentioned earlier has a good base of mining in the general area of Alvaro.
And the two nearest major cities <unk> obviously.
<unk> capital and then closer to the site is a city called komsomolsk on them or both of them are significant sized industrial bases.
The site is accessed with all season road that gets US most of the way there and then beyond that there are seasonal and logging roads that access the site part of the project will be upgrading that infrastructure, but very beneficially to a potential project. There. The site is immediately adjacent to a significant river and is accessible by barge.
So on a relative basis. This site is.
Significantly more accessible than say <unk>.
Great. Thank you Paul.
Paul Rollinson, maybe just stepping back.
You spoke a little bit about tasiast earlier and post the election.
Our new President and the senior ministers that are in place in Mauritania can you talk a little bit about.
How do you expect the process to unfold here in the discussions with the government and reestablishing.
Dialogue with the government.
To date do you think it's a situation where it'll be sort of <unk>.
An amicable sort of discussion on what the future taxes could be or do you think.
The case of.
How do I put it.
Chicken, where you're going to see who flinches first.
When it comes to.
Making concessions do you think that there is room for.
Amicable negotiations here on some of the issues that were brought up by the previous administration.
Yes look thanks Steven.
Again, good question just real time.
Our duration of the president is actually happening today, it may well be over by now so just inaugurated.
Next steps will be formation of a cabinet I expect that'll take a couple of weeks.
And.
As we understand there is a desire to sit down and.
Both sides.
And meet the new administration so.
I would say, we're feeling very good.
The electoral process was very smooth.
International commentators.
Have come out with a sort of favorable commentary on the entire process and during the election campaign. This particular individual was very pro business.
Pro foreign investment.
So.
Yes look we are we're feeling very good about <unk>.
Brian Gauging with this new administration.
<unk>.
The issues again, let me remind you are not <unk>.
Significant there.
Typical.
Of what we'd expect in many countries.
A lot of it relates to supply chain and procurement and that sort of thing and.
As you have seen.
The site itself has continued to just.
Exceeding do exceedingly well third quarter fourth quarter first quarter.
So certainly our discussions with the previous administration and the discussions we hope to have.
With this new administration have not in any way.
Impacted.
The project has done exceedingly well.
The last thing just on a note of kind of goodwill.
We of course.
We're invited to the inauguration today.
And we did have several members of our team.
At the inauguration so we're feeling pretty good about how things have evolved there.
Thanks for that Paul and again, one last question and I apologize for taking up so much of QE.
Q&A, but capital allocation.
With.
Sure.
And as a potential project.
La coipa basically in hand feasibility Lobo pre feasibility.
<unk> expansion.
Other organic projects.
Are you thinking about capital allocation capital allocation over the next three to four years.
Which should we think about and investors think about how youre going to be spending that capital as it stands at the moment.
Yes, another good question.
In the near term and intermediate term the priority again will be tasiast and la coipa.
As we've said we're going to.
<unk> come out with our revised optimized thinking.
Mid September for Tasiast and again, we've said, we'll come out with the completed fees results on Coipa. Later this fall. So those are the near term priorities.
Think though as we look out to the medium term.
We'll be and that's the way we set things up here there'll be.
Not to say, we can't do both but Lobo marte and chill Batkin may well complete.
Compete for capital and we'll be completing studies on both of them around the same time, so Joe back and it will be in the next wave.
<unk> La coipa, and what we intend to do at Tasiast.
Great. Thank you very much.
Steven.
Okay.
Thank you very much and our next question comes from the line of Steven Butler.
<unk> Securities Your line is open.
Okay. Thanks, operator, good morning, guys.
So a question for you guys on the recovery assumptions.
That generated four Chugach Cui.
Quite clear in the release.
Unless I missed it but what's the indicated recut.
Recovery on the work that you've done to date on the heap Leach.
Look again, Steve I'll hand off to Mr. T here, but.
The.
16 months of work.
Lots of due diligence, but I think our starting assumption is relatively conservative, but Paul do you want to maybe comment a bit more on what we used alright. So for the numbers in the press release on the life of mine production.
On a three stage crush getting to 60% recovery, which is at the conservative end of <unk>.
Think we might be able to get to but we want to get through the next round of studies before we.
Potentially increase that number but the number 60%.
Is there a sort of curve is there a sofa component to a poet strikes me with that great that the recovery would we'd like to be a bit higher but anyway.
It's not unusual for heap leaches that kind of American go we were running in the mid sixties.
Tasiast dump leach was around <unk>. So this is a pretty clean leaching oxide.
And as I said, there is potential to improve them with more tests, where we just want to be conservative in our initial estimates.
And guys. The resource you talked about being open along strike.
I mean that is the case.
Willing.
Sort of.
Defined over.
Such a such a strict climbed three 9 million indicated ounces and it's just a matter of where the drills stopped turning is that the idea.
And Thats one of the most exciting things about this project is that.
On the one hand, the base case alone is a very attractive project the heap leach the numbers, we've put out there, but most of the holes terminate in grade.
And it is truly an open deposit and we are already building. The exploration program for next year and it will have a very significant component of drilling at <unk> Dot com. So it is very prospective and very exciting.
Okay. Thanks.
Thanks, guys.
Thanks, Steve.
And again that is star then the number one on your telephone keypad, if you'd like to ask a question, we'll pause for one moment.
And at this time. Our next question comes from the line of Greg Macadam of economics.
Economical insurance I'm sorry. Please go ahead your line is open.
Hi, can we assume that Cooper won't go past 2025 or is there a scenario where you could run both thanks.
Absolutely do not assume it can't run past.
We've had.
A great success.
Finding ounces through.
Through the course of the year.
And that goes back several years. It is an underground operation and there is a limit.
To how far we can get ahead of the curve, but I do like to remind people.
When that asset came into our company the mine life was 2017.
<unk>.
If you look in the rearview mirror each year, we've had very good success.
Continuing to find ounces as we're mining.
Throughout the course of the year and.
I see no issues in our ability to continue to run or have both operations running together.
Yes, we have.
Drilling program, we've uhm as pull indicate we've done 16 months of work on this acid, which included some confirmatory drill holes.
And we've been working over the over over that time period with the seller and we continue to work with them planning to drill program we anticipate.
Being a substantial component in our exploration budget for 2020.
Okay.
That's something doesn't look like a region that's restrictive on a seasonal basis, it's kind of a year round drilling area.
There will be a seasonal component, but it won't be as restrictive as what we currently experience that Google underway nine okay.
Okay.
And could you just remind us in terms of taxes.
How the taxes will kind of flow for that project you get a bit of a tax holiday initially.
Yeah, It's Mike it's just cold, maybe just explain that a little bit because it requires a little bit of context.
Effectively.
The project is is a registered participant on something called the regional incentive plan.
And <unk>.
A regional incentive plans are part and parcel of an overall federal initiative to encourage investment and development in the far east basically.
And this plan provides for a range of reduce tax rates, including corporate property and extraction taxes for a period of up to up to 10 years and.
Based on the law as as we understand them today and some preliminary discussions with the authorities.
We believe these incentives will continue and.
We're in the process of confirming that with the authorities once we're in a position to discuss with them the more specific investment parameters of the project.
[noise] great all right. That's it for me you guys. Thanks, so much crap from a like a solid quarter too.
Thank you.
[noise]. Thank you very much one last time that star one and your telephone keypad, if you'd like to ask a question.
I don't see any more questions and they can't watch her and the call back to the presenters for any closing remarks.
Great. Thank you Suzanne.
Thanks, everyone for joining us today and.
We look forward to.
Catching up with you in person in the coming weeks.
How about how about our business and that's really exciting opportunity thanks very much.
And this concludes today's conference call you may now disconnect.