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Good morning. My name is Christina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Kinross Gold Corporation Q3 2019 Financial Results Conference Call and Webcast. [Operator Instructions] 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 4 members of the Kinross senior leadership team. Paul Rollinson, Andrea Freeborough, Paul Tomory and Geoff Gold. Before we begin, I'd like to bring your attention to the fact that we will be making forward-looking statements during the 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 2 of this presentation, our news release dated November 6, 2019, the MD&A for the period ended September 30, 2019, and our most recently filed AIF, all of which are available on our website. I'll now turn the call over to Paul.
Thanks, Tom, and thank you all for joining us today. Overall, Q3 was a solid quarter for Kinross. Our global portfolio performed well with production and costs in line with our expectations. It was a strong quarter financially. Our adjusted operating cash flow more than doubled over the same period last year as we captured the benefits of higher gold prices and cost improvements, and we made significant progress on our development projects. Paul Tomory will have details on our operations and projects, but I would like to highlight the continued outperformance in Russia and at Tasiast and Paracatu. The combined Kupol-Dvoinoye operation, which consistently performs well, achieved the lowest cost of sales in our portfolio. At Tasiast, production and cost performance remains strong, highlighting the benefits of the Phase 1 expansion. And at Paracatu, throughput and recovery continued to be very strong. However, production, as expected, was lower compared with the record that the mine achieved in the second quarter. Together, these 3 mines produced over 60% of our production with an average cost of sales of approximately $620 per ounce year-to-date. Overall, Q3 performance contributed to excellent results in the first 9 months, and we expect the fourth quarter to be a strong finish to 2019. In terms of financial highlights, which Andrea will speak to in more detail, there were a number of positive developments in the quarter, including increased revenue, cash flow and earnings, a positive revision to our ratings outlook from Moody's and a board approval by the IFC for the Tasiast project financing, a key milestone towards completion. With respect to guidance, I'm pleased to say that we are tracking towards the low end of cost of sales. We are also on track to meet guidance for production, all-in sustaining costs and capital expenditures. In terms of our projects, we announced 2 new development opportunities that we believe will add significant value to our portfolio. First, we announced that we are moving ahead with the capital-efficient Tasiast 24k project. The 24k project builds on the success of Phase 1 and the continued outperformance of the SAG mill, which are significant factors driving low capital costs and robust returns. Since approving the project, we have commenced initial works, mobilized construction contractors and advanced procurement activities. The approval of the 24k project continues the strong momentum at Tasiast. The mine is performing strongly. We have a new 3-year collective labor agreement. We filed an updated technical report last week, and we are actively progressing our discussions with the new government. The other addition to our pipeline that we announced in the quarter is the acquisition of Chulbatkan, a development project in the Far East of Russia. Chulbatkan has a relatively high-grade, open-pit, heap leachable deposit that we believe is an excellent fit for our portfolio given our cold climate heap leach experience. Based on our initial scoping work, we estimate that Chulbatkan could produce approximately 1.8 million ounces over initial 6-year mine life, with first quartile all-sustaining costs in the $550 per ounce range. In addition, we believe there is further upside beyond the current 4 million-ounce resource estimate. The deposit is open along strike and at depth, and there are multiple untested high-quality targets within the 120 square kilometer exploration license. I was recently in Russia to attend the annual foreign investment advisory council meetings shared by the Prime Minister, and we continue to see strong support from the government officials for our investments in the country. Lastly, we do remain on track to close the acquisition in early 2020. Turning to our projects in the U.S. I'm pleased to note that construction and commissioning advantage in Phase W were completed during the quarter. And both of these projects have now been handed over to the operations team. In addition, Gilmore at Fort Knox continues to progress well with stripping for the initial pushback commencing during the third quarter. And finally, we are also making progress advancing the next set of organic opportunities specifically our projects in Chile. To wrap up, our mines generated strong results in the first 9 months of the year. We are on track to meet our full year guidance and are particularly well positioned in terms of costs, and we are making good progress on advancing our development pipeline. We anticipate a strong finish to 2019, and we are excited about 2020. As we move into next year, we will be focused on executing on our projects and capitalizing on the new development opportunities in our portfolio. I'll now turn the call over to Andrea, who will provide an overview of our financial results.
Thanks, Paul. I will begin with a few financial highlights from the quarter, which included strong year-over-year increases to cash flow and earnings. Our global portfolio produced approximately 608,000 ounces with an average cost of sales of $735 per ounce and an all-in sustaining cost of $1,028 per ounce. We sold approximately 16,000 fewer ounces than we produced in the quarter, largely due to the timing of sales at Tasiast and Maricunga. Those ounces were sold in October. We generated approximately $295 million in adjusted operating cash flow, which more than doubled compared with the same period last year. This is largely due to a higher attributable margin per ounce sold, which increased by approximately 70%. Adjusted net earnings increased to $104 million for the quarter or $0.08 per share compared with a net loss of $48 million or $0.04 per share for the third quarter of 2018. Net earnings increased to $61 million compared with a net loss of $104 million in Q3 2018. The increase was primarily the result of higher operating earnings partially offset by an increase in income tax expense. 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 and all-in sustaining costs. With cost of sales averaging $692 per ounce for the first 9 months of the year, we are tracking towards the low end of our cost of sales guidance. Year-to-date capital expenditures were $807 million, and we're tracking towards the higher end of our guidance range. This is mainly the result of decisions we've made to capitalize on value-enhancing opportunities in our portfolio this year, including the Tasiast 24k project, which we approved in September. Initial construction and procurement activities are underway, and we have elected to bring forward some stripping into 2019. We're also expanding the fleet at Paracatu in order to accelerate the mining rate, which is expected to enhance the mine plan and increase cash flow given the excellent performance of the mill. In terms of tax. We've made an adjustment to our full year outlook. We now expect income tax expense to be in the range of $175 million to $195 million on an adjusted basis, which reflects both higher than budgeted gold prices and our production mix. The Tasiast project financing achieved an important milestone in October with the IFC having obtained Board approval. It remains subject to completion of documentation and all lenders obtaining final approvals, and we look forward to completing the work by the end of the year. Looking at our balance sheet. We continue to maintain a strong liquidity position. During the quarter, we extended the maturity of our $1.5 billion revolving credit facility by 1 year to 2024. In October, Moody's revised their ratings outlook for our debt to positive from stable, noting our strong progress in improving operating costs and clarity on the path forward for Tasiast. With available liquidity of $1.8 billion and no debt maturities until September 2021, we have the financial flexibility to invest in our capital priorities. To summarize the quarter from a financial perspective, our portfolio of operations is generating robust cash flow. Our balance sheet continues to be strong, and the project financing is on track to close later this year. I'll now turn the call over to Paul Tomory for a review of our operations and development projects.
Thanks, Andrea. The first 9 months have been strong operationally. And importantly, we remain on track to be one of the safest operators in our sector. This is a significant quarter in terms of advancing our project development pipeline, a key achievement being the completion of our Nevada projects. Construction commissioning will conclude at Phase W and Vantage. And the projects have been handed over to their respective operations teams. Significant stripping activity on the Phase W are progressing well, and are planned to continue until the end of 2020. As we have mentioned previously, the Vantage project and operations at Bald Mountain were challenged by severe weather and poor vendor performance earlier this year, which impacted production ramp-up. While sections of the Vantage leach pad were in operation at the end of Q1, we completed and commissioned a full pad late in the third quarter. Since early September, daily ounce production has steadily increased, and we expect an improvement in production and costs in the fourth quarter. At Round Mountain, Q3 production decreased slightly compared with the second quarter due to the timing of ounces recovered from the heap leach pad and lower mill grade. Cost of sales was higher quarter-over-quarter, mainly due to higher processing costs and fewer ounces recovered from the pads. During the quarter, we also reprioritized our fleet to mitigate the wall failure that occurred late last year. As a result, we stacked fewer tons and anticipate on a north dedicated pad, which is the new pad built as part of Phase W. We have now completed that mitigation work and have ramped up stacking rates, and we expect to see increased production in the fourth quarter. Moving on to our Fort Knox mine in Alaska, Gilmore project continues to proceed on budget and on schedule. Heap leach construction and deepwater activities planned for 2019 are now complete, and we will recommence in the spring of 2020. Stripping for the initial project pushback commenced in the third quarter and we expect to encounter initial Gilmore ore later this year, ahead of plan. In terms of quarterly performance. Production at Fort Knox was largely in line with the second quarter. And the cost of sales per ounce increased compared with Q2 as a result of a higher proportion of ounces produced from the leach pad, a planned mill liner replacement and higher than planned maintenance costs. Turning now to Paracatu. Production continues to be strong with Q3 performance of 146,000 ounces and low costs of $683 per ounce. As Paul noted earlier, production was lower this quarter compared with record-high production in Q2. In Q3, we reverted to mining slightly lower grades, more in line with the life of mine numbers. Throughput and recovery have been higher for 3 consecutive quarters now primarily as a result of the optimization project we undertook last year. We are now comfortable building this outperformance into our future plans for the asset. We are planning to increase the mining rate to take advantage of the sustained increase in throughput that this site has achieved. This is expected to benefit production, cost and cash flow at our largest mine. Overall, we are very pleased with Paracatu's performance and anticipate 2019 to be a record year for the operation. Turning to Tasiast. Initial work at the Tasiast 24k project has commenced, and we have mobilized construction teams for the additional power generation and water supply that we are installing. You will have seen that we filed an updated technical report for the operation last week, and it is available on our website. Detailed engineering is 65% complete and several work packages and contracts have already been awarded. We are ramping up stripping activities in support of 2020, which as you will have seen from the TR, is a peak stripping year. We expect to increase throughput to 21,000 tonnes per day by the end of 2021 and then to 24,000 tonnes per day by the middle of 2023. In terms of performance, throughput continues to exceed expectations. The combination of strong mill throughput and recoveries resulted in approximately 94,000 ounces of production for the quarter. At Chirano and Ghana, the lower throughput was the main contributor to lower production in the quarter. Costs increased compared with the second quarter as a result of higher operating waste related to the return to open pit mining, which we reinitiated earlier this year. Moving on to Russia. Our Kupol and Dvoinoye achieved the lowest cost of sales per ounce in our portfolio in the third quarter. Production of 138,000 ounces was higher than the second quarter largely as a result of higher grades. Overall, our Russian operations are having a great year and continue to be consistent low cost producers. Turning to our Chile projects. We expect to complete the La Coipa FS early next year, and we plan to share the results in February. The Lobo-Marte PFS is progressing well. It's on track to be completed in the middle of 2020. Together, these studies are evaluating potential for long-term production in Chile. To wrap up on our operations and projects. Our priorities continue to be maintaining our excellent safety record, delivering strong, consistent operating results with a particular focus on managing costs and delivering our projects on time and on budget. And with that, I'll turn the call back over to Paul.
Thanks, Paul. To sum up, we had a lot of good news this quarter. Our portfolio of 8 operations is performing well. And we're expecting a strong finish to the year. We are on track to meet our guidance for the eighth consecutive year. We generated robust cash flow as we realized the benefits of higher gold prices, with strong cost performance. And we continue to make significant progress advancing our development priorities. With that, operator, I'd now like to open up the call for questions. Thank you.
[Operator Instructions] Your first question comes from Greg Barnes from TD Securities.
Paul Tomory, on Paracatu, you talked about higher throughputs and lower costs. What are you planning to do there?
Okay. So we have been, for the last 9 months, outperforming our expectations primarily on throughput and recovery. So on throughput, at a given hardness, we're beating the throughput curve by 6%, 7%, 8%, 9%, 10%, depending on the month. And we've now been achieving that for, like I said, the last 3 quarters. As a result of that, the mill has pulled ahead of the mine. The mine is performing on target. But as a result of the sustained throughput out-performance, we're actually going to add some fleet so that we can continue mining in the higher -- the relatively higher grade portion of the ore body. So it's a good news story. And what it allows us to do is to solidify Paracatu production in the annual range of the mid-500s for the next few years. So it's basically a cash flow and a production pull forward, taking advantage of better-than-anticipated throughput in the mill.
What is that going to do to the cost structure, Paul?
It will drop it accordingly with a denominator impact. I mean we're -- I mean Paracatu is truly outperforming right now. We're really happy with that performance. And like I said, we're adding a shovel and 3 trucks, and that will help us to have the mine keep up with the mill.
Okay. So what mill throughput rate are you talking about?
It depends on where we are with hardness, but we're looking at 150,000 to 160,000 tonnes a year.
A day?
A day Yes. Sorry.
Yes. Okay. That's great. And Andrea, the project finance proceeds of $300 million. Are there restrictions on what you can do with that?
No. We'll -- we expect to drop about half of it on closing. And then the remaining half will be drawn, we expect, probably in 2020. So -- but no, we don't have restrictions on what to do with that money.
Can you pay down debt? Or other debt, I guess?
Yes. I mean we can repatriate that cash sort of up the chain and use it to whatever.
[Operator Instructions] Your next question comes from Carey MacRury from Canaccord.
Just have a couple of questions on CapEx. You mentioned being -- expecting to be at the high end of the range for this year. So do we take the 1.05 times 5% less year-to-date? Or is it really 1.05 less year-to-date and then add 5% to that?
I think the point is we're reiterating guidance. We're just going to be towards the high end of guidance. And again, I think that's a good news story. We do have -- we have capacity, and we have new opportunities, and we're really just addressing that. And that's what really is driving us towards the higher end.
And just to be more specific on this. Andrea mentioned this, but the 2 real components that will drive us to the high end of guidance is an opportunistic purchase of shovel and trucks at Paracatu, as I just mentioned, to accelerate the mining rate. And the second is acceleration of stripping at Tasiast as a result of the approval of the 24k project.
Do you want to expand on that? I mean I think -- I guess the point being we weren't accelerating stripping until we made a decision?
That's right. So notwithstanding the fact that we've been stripping over the last few years at the rate required for an expansion. We've been doing that at the low end of that requirement. Now that we have certainty on the 24k project and ramping up first to 21,000 and 24,000, we want to get ahead of the curve so that we're able to feed the best grade when we get that ramped up throughput. So in effect, we're doing a bit of a catch-up on a few years of slightly slower than optimal stripping.
And Carey, the math is -- the guidance is $1.05 billion, plus or minus 5%. So that puts you close to the $1.1 billion on the high end of the range.
Okay. And then maybe sticking with CapEx. You've obviously completed a couple of projects. You've got the Tasiast Phase 2 ramping up. And then you're probably working through budgeting, but directionally, capital into 2020, is it going to be similar levels to this year? Or should we expect it to be up or down? Any guidance you can give out that?
Yes. I mean we're just getting into our budget cycle right now. So we'll share guidance in February for 2020. But as you said, we've got the 2 new projects, Tasiast and Chulbatkan. We still have some continued stripping at Round Mountain for Phase W. So all in all, we expect to be probably slightly below where we were this year.
And then maybe one last question just on the Vantage project that's complete now. How do we think about production ramping up at Bald Mountain going forward over the next couple of quarters?
So we're definitely getting into production from Vantage this quarter, and we saw it already in October. So production in Q4 will definitely be better than what we saw in Q3, and then it'll have ebbs and flows, but we expect a better year next year at Bald.
Good quarter.
Yes. We expect a good fourth quarter at Bald.
Your next question comes from Steven Butler from GMP Securities.
Round Mountain and Bald Mountain, maybe just to come back to those, again, Paul Tomory. Paul, can you remind us again of the leach curve at each of those mines, how slow or rapid is it in terms of percent of gold after so many days, if you have that at the top of your head?
I don't have the exact numbers off the top of my head, but what we struggle with at both sites over the last quarter is in the case of Bald, stacking rates weren't where we wanted them to be, primarily due to poor weather through the winter. We're now starting to see the solution grades, and we are seeing daily production well above what we're seeing in Q3. In the case of Round Mountain, it was -- we had a wall failure last year, and we had to reprioritize the fleet to mitigate that wall failure to essentially clean it up. As a result, we fell a little bit behind on our stacking in Q3 on the new Phase W leach pad. We've now caught up, and we're seeing good production in October on a daily basis from both. As the specifics of the leach curve, we can follow-up with you later on that one.
That's fine, Paul. I mean because actually, your tonnes stacked were actually a very good number at Round Mountain. Almost ...
They were, but they weren't as high as we were hoping. They should have been higher.
Your next question is from Tanya Jakusconek from Scotiabank.
Paul T, we were just talking about Bald Mountain and Round Mountain. So just for myself, you are seeing an improvement in October versus September in terms of the ounces that are coming out of the pads at both of these assets?
Definitely. We had great improvement at both assets.
Okay. That's good news. And then what about Fort Knox? I didn't see anything in the press release. So are we continuing to anticipate a better, strong -- a better Q4 at that asset?
So Fort Knox, we've had a number of challenges this year. We've talked about these on previous quarters, higher than anticipated water, a couple of relatively minor slope failures. But what we've had to do is tap out the mining to accommodate for. So there is a delay in access to some mill ounces. But we expect next year to be more in line with expectations and what we had in our technical report.
Okay. So maybe not a pickup in Q4?
There might be a slight pickup in Q4, but it will be roughly in line.
Okay. And then just on Paracatu, which is the last one. I mean that mine is doing a lot better than I expected in terms of the grade. I think the guidance had been that the grade was going to decline in the second half. As we look at Q4, is that 0.38 grams per tonne going to persist in Q4?
So just a quick description and a reminder of the Paracatu ore body. There's -- it is low grade, but even in the low grade, there are variations from 0.35 to 0.38 to 0.42, even in some places, closer to 0.5. And the acceleration of the mining rate allows us to keep diving into the area of more consistent and better grades. So largely speaking, with the approval of the purchase of these trucks and the shovel, we expect that we'll be mining slightly higher grade materials. So the number that you saw in Q3 is not an unusual number with respect to what we'd expect over the next couple of years. It will continue to vary quarter-to-quarter, but Paracatu has definitely stepped up structurally in its ability to perform.
Okay. So I guess better than we had expected from originally at the start of the year?
That's right. Definitely. And with the acceleration of the mining rate, we will keep ourselves in better grade material for at least the next 2, 3 years.
[Operator Instructions] Our next question comes from Mike Parkin from National Bank.
With Paracatu, did you also adjust some of your grade control practices there with the optimization that you did internally? Or...
Yes. That's a great question. It's all about grade control. We've invested significantly in a grade control program there. And it's really being able to react in real-time to changing characteristics in the ore body. Paracatu is a complex ore body with different hardness zones, clay content, different geochemical and geometallurgical characteristics. So we've invested very heavily in grade control. It's a best-in-class program. And it is one of the things that has led us to be able to outperform versus prior expectations.
Okay. Great. And then in the past, you've -- it's an asset that water is important. How is the water supply looking for the asset now?
This year, we're in good shape. There are no particular concerns on water. As you know, we invested over the last 2, 3 years, in additional water supply capacity, and we're now comfortable with those in place.
We joked -- the minute we got the mitigation in place, we'd revert back to average rainfall, and that's exactly what happened. But having the mitigation does give us some flexibility.
Yes. So we're actually -- we're using that water supply to better manage the water balance throughout the year. And it also contributes to predictable sustained performance in the mill.
Okay. Great. And then with Chulbatkan, obviously, the exploration results that were put out with the announcement of the deal were pretty exciting. When could we expect -- like, obviously, you're looking to close that in the first quarter. Any kind of update in the second quarter, third quarter?
Yes. Look, I think we're chomping at the bit to get this thing closed and you can get to work. And as we get drilling, obviously, once we get something of significance, we're not the kind of company that releases one drill hole at a time. We'll be back to you guys. I mean we are going to be drilling over the next couple of years as we go through, hopefully, growing the resource and getting into our pre-feas and feasibility studies, but we're very excited.
There are no further questions at this time. I turn the call back over to the presenters.
Thank you, Christina, and thanks, everyone, for joining us today. And we look forward to catching up in person in the coming weeks. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.