Kinross Gold Corporation (NYSE:KGC) Q2 2023 Earnings Call Transcript

Kinross Gold Corporation (NYSE:KGC) Q2 2023 Earnings Call Transcript August 3, 2023

Operator: Good morning. My name is Rob and I will be your conference Operator today. At this time, I would like to welcome everyone to the Kinross Gold second quarter 2023 results conference call and webcast. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press the star, one. Thank you. Chris Lichtenheldt, Vice President, Investor Relations, you may begin your conference.

Chris Lichtenheldt: Thank you and good morning. With us today, we have Paul Rollinson, President and CEO, and from the Kinross senior leadership team, Andrea Freeborough, Claude Schimper, Ned Jalil, and Geoff Gold. For a complete discussion of the risks and uncertainties which may lead to actual results differing from estimates contained in our forward-looking information, please refer to Page 2 of this presentation, our news release dated August 2, 2023, the MD&A for the period ended June 30, 2023 and our most recently filed AIF, all of which are available on our website. I will now turn the call over to Paul.

Paul Rollinson: Thanks Chris and thank you all for joining us. This morning, I will provide a brief overview of our second quarter, comment on our outlook, and update you on our ESG initiatives. I will then hand the call over to Andrea to walk through our financial performance, and then Claude and Ned to discuss our operating performance and projects. We had a great second quarter contributing to a strong first half of the year, positioning us well to meet our full year guidance. Tasiast, Paracatu and La Coipa delivered excellent results, representing approximately 70% of our production in the quarter with an AISC of approximately $1,000 per ounce driving strong free cash flow. At Paracatu and La Coipa, good performance was driven by strong grades and recoveries.

At Tasiast, the ramp-up continued during the quarter and the operation delivered record production of nearly 160,000 ounces at a cost of sales of approximately $650 per ounce. Construction of the 24K expansion project is now complete and we are well on our way towards sustaining higher throughput levels by year end. Our U.S. operations delivered on plan with stronger production over the prior quarter. While costs at the U.S. assets are expected to increase in the second half of the year, the mines are performing as planned and we continue to work towards lower cost production next year with the start-up of Manh Choh and favorable mine sequencing in Nevada. At Manh Choh, construction activities are advancing well and the project remains on schedule and on budget to begin contributing high grade ore to the Fort Knox operation in the second half of next year.

At Round Mountain, we remain excited about the future. We are encouraged by ongoing optimization for the Phase S open pit and expect to complete the work later this year. Work on the underground decline at Phase X is progressing well and we are on schedule to begin definition drilling early next year. As you will see in the video link provided in our press release, we see potential for a lower cost bulk underground mining operation at Phase X with further exploration upside. Gold Hill, our satellite deposit at Round Mountain continues to deliver strong exploration results, further confirming our view that there is potential for additional high margin underground mill feed at Gold Hill to supplement Phase X OR. Finally, we continue to make excellent progress at Great Bear and the work we’ve done continues to support our view that this development project is expected to become a top tier mine.

We currently have 11 drills onsite and the focus has been on extending our underground resource below the initial open pit resource. We will be updating our resource statement at year end and expect a meaningful increase to the underground resource. We are pleased to have recently signed an amended advanced exploration agreement with our partners, the Wabauskang and Lac Seul First Nations, on whose traditional territories the project is located. This amended agreement reflects the changing nature of activities from surface exploration to underground exploration as the project advances. At Great Bear, the path is clear as we continue to focus on advancing the project through permitting and construction. Ned will elaborate on other activities at Great Bear later on the call.

Year to date, we have produced over 1 million ounces and we remain on track to achieve our production and cost guidance for the year. We strengthened our balance sheet during the quarter and at current gold prices, we expect this trend to continue. Our quarterly dividend remains in place, which offers a competitive yield of nearly 3%. Since 2023, we have repurchased $400 million of shares, representing 8% of our shares outstanding. Overall, we view the buyback program as very successful; however, in accordance with the plan we announced last fall, we have paused share buybacks based on the change by one of our rating agencies moving our outlook from stable to negative. As a result, we are prioritizing debt repayment and in Q2 we repaid $220 million of debt and we plan to repay the remaining $100 million drawn on our revolver in the coming months.

Going forward, we will continue to review our capital allocation priorities in the context of the prevailing environment. Lastly, I’d like to highlight our latest update on ESG initiatives. We recently published our third annual climate report which details climate-related disclosures for last year. The report also outlines our progress towards meeting our climate-related goals and provides detail on our climate change strategy and our plan to reduce greenhouse gas emissions intensity going forward. Notably in the report, we provide an update on our Tasiast solar project which we expect will be delivering 34 megawatts of renewable energy by the end of this year. For context, 34 megawatts of clean energy is the equivalent to removing more than 10,000 gasoline-powered vehicles from the road for each year of the operation.

We continue to be very proud of our work in this important area. With that, I will now turn the call over to Andrea.

Andrea Freeborough: Thanks Paul. This morning I’ll discuss financial highlights from the quarter, provide an overview of our balance sheet, and comment on our guidance and outlook. As Paul noted, our second quarter performance was strong with production and cash flow improving over the prior quarter, as planned, and over last year. We produced 555,000 ounces with production benefiting from seasonality in our business, including mine sequencing at Paracatu and ramp-up at Tasiast and La Coipa. Gold sales of 553,000 ounces were in line with production. In Q2, our average realized gold price was $1,976 per ounce, in line with the average spot price. Cost of sales of $900 per ounce was lower over the prior quarter due to higher production and particularly strong cost performance at Tasiast, Paracatu and La Coipa.

Cost of sales at these three assets averaged $725 per ounce, driving strong operating and free cash flow. All-in sustaining costs were $1,296 per ounce in Q2, which was also lower quarter over quarter primarily due to lower cost of sales. All-in-sustaining costs at Tasiast, Paracatu and La Coipa were approximately $1,000 per ounce. First half cost of sales were $941 per ounce. We remain on track to meet our full year cost guidance of $970 per ounce. Costs are expected to increase in the second half of the year due to the accounting impact of drawing down on our inventory at Round Mountain. We expect costs to come back down next year. In Q2, our adjusted earnings per share was $0.14 and adjusted operating cash flow per share was $0.37, both improving over the prior quarter.

Free cash flow for the quarter was $247 million or $177 million excluding working capital changes. Turning to the balance sheet, our financial position continued to improve in the second quarter and remains strong. We ended the quarter with $478 million in cash and approximately $1.9 billion of liquidity, both improving over the first quarter. Our debt declined by approximately $220 million during the quarter as we repaid $200 million on the revolving credit facility, as well as $20 million on our Tasiast loan. As Paul mentioned, we plan to prioritize repayment of the remaining $100 million on our revolver this year, further deleveraging our balance sheet. Our trailing 12-month net debt to EBITDA ratio improved as of quarter end and is now 1.3 times, and at current gold prices is expected to decline further through the remainder of the year.

At the end of the second quarter, we announced a debt refinancing whereby we issued $500 million in senior notes due in 2033 to replace our outstanding 2024 senior notes on a comparable interest rate. Following first half results, we remain on track to meet our full production and cost guidance. We achieved approximately 49% of our full year production guidance in the first half and the second half remains on plan. On inflation, as a reminder, we factored a 5% increase into our cost of sales guidance for this year relative to full year costs in 2022, and we still believe this is an appropriate estimate. So far this year, oil has been trending positively; however, this continues to be offset by higher royalties as a result of stronger gold prices.

Capital expenditures remain on track and our capex forecast for the full year remains roughly evenly split between sustaining and non-sustaining items. In summary, we are reaffirming our full year guidance for production in the range of 2.1 million ounces, cost of sales of $970 per ounce, and AISC of $1,320 per ounce, all within a plus or minus 5% range. I’ll now turn the call over to Claude to discuss our operations.

Claude Schimper: Thank you Andrea. As Paul and Andrea highlighted, we saw strong performance from our operations in the second quarter with higher production and lower costs compared to Q1, with all of our mines delivering on plan. Tasiast delivered another robust quarter with production of 158,000 ounces at an impressive cost of sales of $652 an ounce, improving over the prior quarter on higher throughput and improving recoveries. Remaining tie-ins were completed in June and commissioning continues in [indiscernible]. In addition, we are making progress on the throughput ramp-up. The plant has achieved throughput of 24,000 tons per day for sustained periods of time and has also reached as high as 28,000 tons per day on several occasions, thus demonstrating the operations’ ability to achieve the expanded throughput.

Our focus is now on sustaining this higher throughput which we expect to achieve by the end of the year. At the Tasiast solar project, solar work is essentially complete and mechanical works are well advanced with a focus on the installation of the photovoltaic modules. We have now installed 65,000 out of the total 80,000 panels planned. Electrical work is underway and planning for commissioning has begun. This project is on schedule for completion by the end of the year. At La Coipa, production is tracking well against our full year plan. Continued outperformance on greater recovery is driving production while plant optimization continues through the second half of the year. La Coipa continues to contribute robust free cash flow and was the lowest cost, highest margin mine in our portfolio in the second quarter.

Following first half production at La Coipa, we remain on track to meet our full year production guidance in the range of 240,000 ounces. At Paracatu, increases in grade and recovery led to an improvement in the production and costs in Q2. Q3 production is expected to be the strongest for the year, driven by increased mining rates in the higher grade deeper areas in the southwest of the pit. Paracatu remains on track to achieve its full year production guidance in the range of 580,000 ounces. Now moving to the U.S. operations, production and costs improved across our operations in Q2 and we are on track with our full year guidance. As discussed earlier, costs at these assets are higher relative to the rest of the portfolio and are expected to increase in the second half of the year before declining next year.

Beginning with Fort Knox, Q2 production was higher quarter over quarter due to planned higher processing grades. We saw strong performance from the mill and have benefited from some additional ounces from unplanned ore material encountered in the Phase 10 stripping. Work advanced well on the Fort Knox mill modifications to accommodate ore from the Manh Choh project and we are on track to begin processing high grade ore from Manh Choh in the second half of next year. At Bald Mountain, production improved over the prior quarter as higher mining rates were realized in Q2 following the weather challenges in Q1, leading to higher leech stacking rates. At Round Mountain, we achieved our planned production for the quarter, which was relatively flat compared to Q1.

As Andrea mentioned, cost of sales at Round Mountain are expected to increase in the second half of the year before declining next year, as the Phase W investment period wraps up and mining shifts to the lower strip areas with higher grades. With that, I will now turn the call over to Ned.

Ned Jalil: Thanks Claude. I’ll start by elaborating on Round Mountain, then comment on our Manh Choh and Curlew project before finishing with an update on Great Bear. While Round Mountain is currently in a period of elevated costs, I wanted to take a minute to update you on why we remain excited about the future of Round Mountain. Following the period of investment in the near phases, Round Mountain has the potential to be a significant producer through the 2030s with higher margin and strong returns on invested capital. Here’s how we currently envision the future of Round Mountain. We are currently mining through the remaining portions of open pit Phase W2, which is expected to maintain our current production levels through 2024 and provide a new unleached tail into 2025 and early 2026.

After mining in Phase W2, we are studying the option to transition to Phase S, which could sustain open pit production through the early 2030s. Concurrent with open pit mining at Phase S, we could also potentially begin underground production from Phases X and Gold Hill later in the decade. We are pleased with the ongoing work in the following areas. At Phase S, ongoing optimization work is showing encouraging results with lower capital intensity on lower strip driving improved economics compared with our prior view. At Phase X, construction of underground exploration declines is progressing well with 350 meters developed thus far. The decline is on track to facilitate the start of definition drilling early next year with production from Phase X envisioned to begin in late 2026.

The future of Round Mountain continues to take shape and we look forward to sharing more positive developments over the coming quarters. Coming back to Gold Hill, which is located 70 kilometers away from the Round Mountain pit, we continue to see strong potential for a higher grade underground mine supplementing production from Phase X. Drilling this year has confirmed an 800 meter west strike extension with multiple high grade intercepts. During the quarter, we had our best result to date, hitting more than 40 grams per ton over approximately two meters. With continued exploration success at Gold Hill, we look forward to ultimately bringing this high grade satellite deposit into our broader plans at Round Mountain. Moving to Manh Choh, project activities remain on schedule and on budget, and we are pleased to report the mine operating permits were received during the second quarter.

Contracting and procurement activities are now complete and construction and mining activities are ramping up. Construction on the mill modifications at Fort Knox to process the Manh Choh ore has commenced and the Kinross operations team is now fully staffed, while on-boarding of key business partners to support the mining and ore transport is ongoing. We are excited about bringing this high grade and margin project into production next year. At Curlew in Washington State, results from ongoing underground exploration continue to confirm vein extensions and continuity with high priority target areas. Exploration drilling will continue throughout the third quarter with an aim to build on the resource through proximal growth. Notably, yesterday’s release includes the best data sets from Curlew in the past 10 years with Hole 1148 intersecting 41 grams per ton over two meters.

We remain excited about this project and look forward to continuing to advance our work over the coming quarters. Moving to the update on Great Bear, in the second quarter we continued to make excellent progress on several fronts. Starting with exploration, there are currently 11 drill rigs operating on site and in Q2, we drilled approximately 56,000 meters, bringing the year-to-date total to approximately 96,000 meters. Exploration is focused in the area 500 meters to 1 kilometer below surface at the LP Fault zone, and drilling efficiency introducing directional drilling has been enhanced. This method decreases the amount of drilling required to reach these targets, improving productivity and cost per meter drilled while also allowing for more efficient and precise targeting.

With improved focus on resource expansion, recent results are encouraging as we continue to confirm high grade mineralization at depth [indiscernible] Hole VR805, which intersects at 6.7 meters at a grade of 19.3 grams per ton at a vertical depth of 730 meters. With the success of our drilling campaign so far this year, we have seen meaningful growth in the underground resource. Outside of drilling, other activities are also advancing well. Feasibility level engineering for the AEX [indiscernible] infrastructure is approximately 70% complete, including geophysics and soils geotechnical drilling, and the procurement process for long lead items, such as the camp, power infrastructure and water treatment plant have commenced. Three engineering firms with significant experience in Ontario have been engaged to support our strong in-house owners team.

Engineering and field [indiscernible] campaigns for the main project continue to advance well with results of this work to be included in our preliminary economic assessment next year. Permitting activities are also progressing well, including initial reviews by the Impact Assessment Agency of Canada of the draft initial project description. I will now turn it back to Paul.

Paul Rollinson: Thank you Ned. Before concluding, I want to acknowledge and thank Ned for his significant contribution to Kinross over the years, so thank you Ned and all the best in your next chapter. In closing, we are meeting our goals and have delivered a strong Q2 and first half and are on track with our plans. We are excited about our outlook. We have a strong production profile, we are generating significant cash flow, we continue to return capital to our shareholders through an attractive dividend, we have an exciting pipeline of exploration and development opportunities, and finally we are very proud of our commitment to responsible mining that has made us a leader in ESG performance within the industry. With that, Operator, I’d now like to open up the line for questions.

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Q&A Session

Operator: [Operator instructions] Your first question comes from the line of Josh Wolfson from RBC Capital Markets. Your line is open.

Josh Wolfson: Yes, thanks very much. With the disclosure of the Great Bear underground resource upside, I’m just wondering, and I know it may be a bit early, is there any read-through here to potential design changes or is this more so confirming some of the mine life extension that was signalled with the original study?

Ned Jalil: Hi, good morning, this is Ned. It’s actually the latter, so it is an extension of the resource. We’re growing the resource in the underground and you’ll see the update with year-end resources. Pretty exciting. Fundamentally, the design, as we’ve described it earlier, is open pit with an underground mine and starting with tonnage coming mainly from the open pit, a little bit from the underground, and transitioning to a full 100% underground mine to take us through decades as the resource grows. What’s exciting for us lately is that we’re actually seeing the grade increases [indiscernible]. It’s very exciting and look forward to our releases in the coming quarters and [indiscernible] resource.

Josh Wolfson: Thanks, and on the outlook for Tasiast, the grade in the second quarter continued to be pretty strong. What is the potential for that grade to continue even as throughput ramps up in the second half, and then as a follow-up to that, the prior mine plan had outlined a larger drop-off in upcoming three years for the existing guidance. Is there any opportunity to sort of re-think sequencing that with some of the performance we’ve seen this year?

Claude Schimper: Josh, it’s Claude here. We have seen obviously the grade in the second quarter was better. We are balancing–the Tasiast mining is slightly ahead of plan, so we were able to increase our stockpile slightly and with that, we were able to plan a little bit better and balance the grade expectations. We do see it still strong in Q3 but dropping off in Q4, and then as we go into 2024, we’re going back into the mine plan and it will go down a little bit more.

Josh Wolfson: Okay, thank you very much.

Operator: Your next question comes from the line of Fahad Tariq from Credit Suisse. Your line is open.

Fahad Tariq: Hi, good morning. Thanks for taking my question. Just going back to some of the comments around debt reduction, is there a particular leverage target that you’re looking at? I know the buyback, I think the parameter was 1.7 times net debt to EBITDA. I believe on my math, you’re already below that or slightly below that, and just curious on how you’re thinking about maybe a targeted leverage ratio.

Andrea Freeborough: Sure. It’s Andrea here, Fahad. The 1.7 that we talked about when we launched the enhanced buyback was just where our net debt to EBITDA was at that point in time, and that was just part of the design of the plan, which was always meant to protect the balance sheet and our investment-grade rating. We are below that now, so we’re just around or just slightly below 1.3 times at the end of the second quarter. We were 1.65 at the end of Q1, so the improvement in Q2 was half related to debt reduction and half higher EBITDA. Our priority going forward, as Paul and I both said in our remarks, is to first of all repay the remaining $100 million we have drawn on the credit facility – that’s in addition to the 200 we repaid during the quarter, and then beyond that, we would target starting to take down the term loan, the billion-dollar term loan that we took out to finance the cash portion of the Great Bear acquisition.

That’s due in early 2025, but it has flexible repayment terms so we can start repaying that at any point in time. In terms of target leverage ratios, yes, we would like to continue to reduce, and below 1 would be great. Depending on gold price, if we were at or above $2,000 gold, we’d expect to get there sort of towards the end of the year, so we’ll see where we get to with gold price as we go through the year here.

Fahad Tariq: Then speaking with the rating agencies, I don’t know if you have, but have they communicated what it would take to get back to a stable operational outlook?

Andrea Freeborough: I guess maybe it’s helpful just to comment on how–I mean, it’s S&P that moved us to negative outlook, and how they look at it, it’s a pretty strict definition that drives to the negative outlook. I think it’s a 30% chance that we would be downgraded in that lower gold price scenario, so they were using a 1400 long term scenario, so. We don’t agree with that negative outlook, and in a lower gold price scenario, there’s levers that we would pull to protect the balance sheet and protect the rating. But it is what it is in terms of their rating, and so I expect the actions we’re taking now in terms of debt repayment will get that outlook reversed, all else being equal. But in terms of when they might review again, it’s typically at least a couple of quarters, so I would expect that will be sometime next year, either after year end or after Q1.