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Kinross Gold (NYSE:KGC)
Q3 2020 Earnings Call
Nov 05, 2020, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Ladies and gentlemen, thank you for standing by and welcome to the Kinross Gold Corporation third-quarter 2020 results conference call and webcast. [Operator instructions] I would now like to hand the conference over to your speaker for today, Mr. Tom Elliott, senior vice president of investor relations. Thank you.

Please go ahead, sir.

Tom Elliott -- Senior Vice President of Investor Relations

Thank you. Good morning. With us today, we have Paul Rollinson, president and CEO; and Kinross' senior leadership team, Andrea Freeborough, Paul Tomory, and Geoff Gold. 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 2 of this presentation, our news releases dated November 4, 2020 and MD&A for the period ended September 30, 2020, and our most recently filed AIF, all of which are available on our website. I'll now turn the call over to Paul.

Paul Rollinson -- President and Chief Executive Officer

Thanks, Tom. And thank you all for joining us today. I would like to start by acknowledging all of our employees who have worked very hard to help us deliver another strong quarter in what continues to be a challenging environment caused by the ongoing pandemic. The safety of our employees, their families and our host communities is and always will be our first priority.

This morning, I'm pleased to report that Kinross delivered strong Q3 results. It remains on track to meet our full-year guidance for the ninth consecutive year. This morning, you will hear how our company is technically strong with an excellent operational track record and is delivering very strong free cash flow with attractive yield. Before turning the call over to Andrea for a financial review, and to Paul for an operating review, I will comment briefly on the quarter and a few notable developments.

All the company's operations performed well during the quarter. We are pleased with the significant growth we have achieved in margins, earnings and free cash flow. Once again, our three largest mines Paracatu, Kupol-Dvoinoye, and Tasiast accounted for 60% of total production and delivered among the lowest costs in the portfolio. During the quarter, our commitment to continuous improvement again delivered tangible results.

Our margin perhaps increased 60% compared with last year outpacing the 30% increase in the average realized gold price. This translated into a robust growth in free cash flow which was approximately $330 million in Q3, our highest quarter in some time. As a result, our investment grade balance sheet was further strengthened. And we finished the quarter with over $900 million in cash after fully repaying our revolver during Q3.

Kinross had several notable accomplishments during the quarter. In August, we released our Sustainability Report highlighting the company's strong record on ESG which you can find a link to in last night's press release. On September 17, we announced the following: First, our intention to repay the remaining balance on our revolver which we have now been; second, the reinstatement of our 2020 guidance and the introduction of a multi-year production guidance to 2023 which is expected to increase by 20% to approximately 2.9 million ounces over this timeframe; and third, the reinstatement of our quarterly dividend which is a direct reflection of our operational success, financial strength and strong outlook. During the quarter, we also completed the acquisition of a 70% interest in the Peak project in Alaska.

This transaction demonstrates our ability to find high-return low-capital opportunities that leverage our existing infrastructure and technical expertise. And finally, two weeks ago, we hosted an operations update that provided additional detail on our recent 3-year production guidance, and also provided visibility into our extensive pipeline of projects that we expect will sustain our production through the end of this decade. As you can see, it's been a very busy few months for us and we are pleased to have delivered on a number of positive updates during the quarter. I'll now turn the call over to Andrea for a more detailed review of the financial results.

Andrea Freeborough -- Vice President, Finance-Operations and Projects

Thanks Paul. I'll begin with a few financial highlights from the quarter, touch on capital expenditures and by commenting on our balance sheet. During Q3, we produced approximately 603,000 attributable gold equivalent ounces and sold approximately 589,000 ounces at an average cost of sales of $737 ounce and all-in sustaining cost of $958 per ounce. As expected, production did increase throughout the year with the third quarter being a strongest year to-date.

We expect this trend to continue into Q4. We're pleased with our production and cost performance which despite COVID-19 related challenges continue to track within our guidance. Paul commented earlier on the increase in our margins outpacing the increase in gold price. I will add that our AISC margin which increased by $511 per ounce to $950 also outpaced the $441 increase in our average realized gold price compared to the prior year, a testament to our disciplined cost control.

We sold approximately 15,000 ounces fewer than we produced, mainly as a result of the timing lag at Bald Mountain. The lag on timing of sales is not uncommon at Bald Mountain and it is expected to even out over time. Our adjusted EPS of $0.25 and adjusted operating cash flow per share of $0.44 were both up significantly compared to the third quarter last year due to strong operating performance and higher gold prices. These adjusted figures exclude approximately $17 million of COVID-related costs during Q3 which was down from approximately $23 million in Q2.

These costs are primarily driven by quarantine measures taken at site. So as long as quarantine is necessary, these costs will persist. Adjusted operating cash flow increased to $550 million from $295 million last year. And as Paul mentioned earlier, free cash flow for the quarter was approximately $330 million demonstrating continued growth in free cash flow throughout the year.

We expect free cash flow to remain strong in Q4. Capital expenditures during the quarter were $212 million which was roughly in line with Q2 expenditures. capex for the first nine months was approximately $618 million. We expect our capex spend in Q4 to be the highest of the year and we still expect to finish 2020 within our guidance range of $900 million plus or minus 5%.

As previously stated, our slower pace of spending so far this year has been mainly related to delays in capital stripping at Tasiast which has been impacted by COVID-related constraints on the movement of personnel and also by the strike at site earlier in the year. Following another quarter of strong results and strong free cash flow, at September 30th, we had $934 million of cash and cash equivalents. This is after our purchase of the 70% interest in the Peak project for $94 million and after repaying a $750 million on our revolver. We've now fully repaid our revolver which reflects a couple of key factors.

One, the substantial free cash flow we're generating combined with our strong operational outlook, has us well-positioned from an available cash standpoint. And two, while we recognize we'll be living with various pandemic-related risks for some time, we're increasingly comfortable with the overall operating and financial environment globally. As of the end of September, our total debt was just over $1.9 billion. And our trailing 12 month net debt-to-EBITDA ratio improved once again and is now close to 0.5 times.

At current gold prices, we expect to be approaching zero net debt at the end of 2021 Finally, as you know, we announced the reinstatement of our dividend during the quarter with the board approving a plan to pay quarterly dividends of $0.03 per share going forward. This new dividend plan amounts to an annual payout of approximately $150 million and fits well within our financial capacity. In summary, we're comfortable with Kinross' liquidity position, and we believe we have a strong base to continue funding our business in the current environment. I'll now turn the call over to Paul Tomory.

Paul Tomory -- Chief Executive Officer

Thank you very much Andrea. As Paul mentioned, we hosted a detailed operations update a couple weeks ago. And as such, I'll focus on our Q3 results today and will go through any new detailed updates on our projects and explorations. As always though we'll be happy to take additional questions you may have on those topics.

First, I'll spend a few minutes providing a brief update on COVID-related topics, and then I'll give a brief summary of how the operations are performing. Broadly speaking, our portfolio of operations continues to manage very well through COVID-19. We acted early and took important measures that have allowed us to minimize the impact of it on our business, and we continue to adjust to the new normal. To date, we've not experienced any material negative impacts and remain on track to achieve our guidance for the year on both operations and projects.

As Paul indicated, our three biggest mines continued their strong performance and accounted for 60% of third-quarter production, with a combined cost of sales just below $650 per ounce. While still attractive, costs of the big three were up slightly compared with Q2 largely due to Paracatu. It was once again our largest producer and continues to deliver strong results. However, production decreased by approximately 8,000 ounces over the previous quarter.

Lower production was a result of lower throughput during the quarter due to the planned maintenance and recoveries were also slightly lower as a result of anticipated changes in our characteristics. But once again, in line with our overall plan in the technical report. Production is expected to improve as we move into higher grade ore in the fourth quarter and into next year. Costs are up compared with last quarter due to the lower throughput and low recovery.

Turning to Russia, Kupol and Dvoinoye delivered another excellent quarter with cost of sales below $550 per ounce, the lowest in the portfolio. Production was largely in line with last quarter, however reduced mining activity at Dvoinoye and favorable foreign exchange rates drove cost of sales down just below $550 per ounce, the lowest level in two and a half years. And as we said on October 20th we're very pleased with our exploration results in Russia and our ability to expand mine life of Kupol. Tasiast had a good quarter operationally as mining rates continue to ramp up and production improved with record mill grades and higher throughput.

Production of 46,000 ounces for the month of August was a record net positive. Following strike and COVID-related impacts early in the year, mining rates are now near back to full capacity. However, as a result of these issues, approximately 100,000 ounces of production is expected to be deferred from '21 to '22. Turning to our U.S.

operations which delivered an excellent quarter of higher production at low cost at across all three sites. At Fort Knox, we're very pleased with the results achieved during the quarter. And I'm happy to say we expect continuation of strong results going forward. It delivered a 30% increase in mill throughput compared with Q2.

And despite furthering lower grades, production and costs both improved substantially. These are due to several factors. We have opportunistically lowered the cutover grade which is allowing us to economically send more ore to the mill that would have previously gone to leach pads, and of course, achieving higher recoveries. We caught up on the mine plan following a period of very challenging weather and we've also seen some positive reconciliation in the current mining zones.

We're also pleased to say that the work on the infrastructure processing facilities component of both Gilmore projects have now been substantially completed on time and slightly under budget, with first ore stacked on new branch Barnes Creek heap leach pad in October. At Round Mountain, production was in line with Q2 with cost of sales decreasing mainly due to lower contracted costs. While at Bald Mountain gold production costs improved slightly compared with the second quarter and the operation is performing in line with our expectations from a technical perspective. Concluding with Ghana at Chirano, throughput improved compared with Q2 as some unplanned downtime at the process plant last quarter was resolved.

However, costs increased approximately $40 per ounce due to higher milling costs. At Chirano, like Kupol, we are very happy with our exploration successful here and are optimistic about continued mine life extensions. To wrap up, on operations and projects, our priorities continue to be focusing on the health and safety of our employees, particularly during this pandemic period, delivering strong consistent operating results and delivering our projects on time and on budget. And with that, I'll turn the call back over to Paul.

Paul Rollinson -- President and Chief Executive Officer

Thank you, Paul. I want to reiterate my gratitude to our employees, suppliers, communities and the host governments who all continue to work together to help us stay safe and productive. As a result of everyone's hard work, all of our sites are operating, and our projects continue to advance on time and on budget. Notwithstanding COVID, our business remains very well-positioned.

Our commodity prices and currencies are favorable. We have an attractive global portfolio of operations coupled with a robust pipeline of projects and exploration opportunities. We have a proven track record for operational excellence and project execution. And we continue to build on that record across all of our geographies.

And we continue to grow our free cash flow, and further strengthen our balance sheet. With these characteristics, we are in great shape to continue to drive meaningful value creation and share price appreciation over the coming quarters and years. With that operator, I'd now like to turn -- open up the call to questions.

Questions & Answers:


Operator

[Operator instructions] Your first question comes from the line of Carey MacRury with Canaccord Genuity.

Carey MacRury -- Canaccord Genuity -- Analyst

Hi. Good afternoon everyone. Congrats on a good quarter there. Just a question on the capex, it looks like you're sort of tracking under your guidance for the year.

I'm just wondering, should we be expecting a pickup in Q4?

Andrea Freeborough -- Vice President, Finance-Operations and Projects

Hi, Carey. It's Andrea. Yes, we've typically picked up -- capex has picked up in the past in Q4. And we do expect that this year as well.

While the reasons for the slowdown has been stripping at Tasiast, they're not getting back up to our planned rate. So we do expect to come in within our guidance of $900 million plus or minus 5%.

Carey MacRury -- Canaccord Genuity -- Analyst

Do you think it will be sort at the lower end of that range or what do you expect?

Andrea Freeborough -- Vice President, Finance-Operations and Projects

We're just sticking with that range. It will be within the range.

Paul Tomory -- Chief Executive Officer

Well, Carey, just to give you some numbers on that, stripping Tasiast during the third quarter, it was around 50 million. We're looking at nearly a double on that in the fourth quarter. And we've commenced works on the power plant at Tasiast which is a pretty big dollar item. So Tasiast will drive a pretty big step up.

Carey MacRury -- Canaccord Genuity -- Analyst

And I guess in the MD&A you write about intermittent power issues at Tasiast. Is that a resolved issue or is that something to be carry-forward into Q4?

Paul Tomory -- Chief Executive Officer

No. It's resolved. It was one of the impacts to throughput -- just to take a step back, one of the impact -- two of the impacts to throughput at Tasiast were one is, more than anticipated downtime because we didn't have enough people at site at various times due to COVID related travel impacts. And there were some pretty extreme wind and rain events, believe it or not, rain at Tasiast, we do periodically have big rain events and some downtimes on the mills as a result of that.

Carey MacRury -- Canaccord Genuity -- Analyst

OK. And maybe one last one for me. Just on other operating costs, I know the guidance at the start of the year was around $100 million. I think half of that was due to care and maintenance costs in Chile and Kettle River.

Just wondering how that should evolve going forward? And then presumably I guess when that comes up, does that take care of the smelter? I guess, that's more related to Maricunga, I suppose.

Andrea Freeborough -- Vice President, Finance-Operations and Projects

Yeah. Well, first off, I'll just comment on the guidance. So the guidance was $100 million at the start of the year. And we've increased that to $140 million which is really related to the additional COVID costs that we've been seeing this year.

In terms of care and maintenance, we're just in our budgeting process now. So, we'll come out with our guidance for 2021 early next year.

Carey MacRury -- Canaccord Genuity -- Analyst

Maybe, I guess, just philosophically origin and timing, and so it will come down at some point in time. It seems like a pretty heavy run rate. Or it's not so much?

Paul Rollinson -- President and Chief Executive Officer

You're probably right, I guess. Carey, why didn't you just speak that with us? We just -- we haven't updated that at this point. But directionally, I see where you're coming from.

Paul Tomory -- Chief Executive Officer

At Maricunga, I mean we are working on the optimized plan there for the next several years. So one of the focus there is on reducing ongoing costs.

Carey MacRury -- Canaccord Genuity -- Analyst

OK, great. That's it for me. Thank you guys.

Paul Tomory -- Chief Executive Officer

Thank you.

Operator

[Operator instructions] And there appears to be no questions at this time.

Paul Rollinson -- President and Chief Executive Officer

OK. Well, thank you, Ashana. Thank you, operator. And thanks, everyone for joining us this morning.

We look forward to catching up with you in the coming weeks. Thank you.

Duration: 21 minutes

Call participants:

Tom Elliott -- Senior Vice President of Investor Relations

Paul Rollinson -- President and Chief Executive Officer

Andrea Freeborough -- Vice President, Finance-Operations and Projects

Paul Tomory -- Chief Executive Officer

Carey MacRury -- Canaccord Genuity -- Analyst

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