Kinross Gold Corporation

Good morning. My name is Laura, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ken Ross Gould Corporation first quarter 2020 results conference call-in webcast. All participants are in listen-only mode to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, 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. Good morning. With us today, we have Paul Rowlinson, President and CEO, and the Kinross Senior Leadership Team, Andrea Fribero, Paul Tamori, and Jeff 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 two of this presentation, our news release dated May 5th, 2020, the MD&A for the period ended March 31st, 2020, 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. This morning we'll provide an update on how we're managing in the current environment and our quarterly results. First, however, I want to convey that our thoughts are with all those who have been affected by the pandemic. As well, On behalf of our company, I'd like to express our deepest gratitude and respect for all of the frontline workers who continue to put themselves at personal risk during this crisis. Regarding Kinross, we, like many companies, are facing various pandemic-related challenges across our business. However, through a combination of early planning, disciplined adherence to health and safety protocols, and support of host governments, all of our minds remained in operation during the quarter and have not been materially impacted. During the quarter, we did not experience significant business interruptions, and most importantly, our employees were healthy and safe. However, we are taking nothing for granted and have established business continuity and contingency plans to help us manage a wide range of financial and operational scenarios. Throughout this crisis, we have been working closely with our host governments and communities to aid their campaigns to control the spread of COVID. We've committed $5.3 million in support of local efforts to provide medical supplies, equipment, and food aid at our sites around the world. Despite this challenging environment, we have performed well and we are proud of our first quarter results. Our three largest mines, Barakatou, Coupole de Voynoy, and Tassius delivered strong production and cost during the quarter. Of note, Tassius delivered its second consecutive quarter of record production. As is the case with any global portfolio, There were some puts and takes during the quarter, and we did encounter some challenges at our smaller mines. However, the impact to the company as a whole was relatively small. On April 1st, as part of our COVID update, we also provided a look at some preliminary Q1 results, including sales, production, costs, and our balance sheet position. Importantly, our cash flow and balance sheet are well ahead of our initial budget, which assumed $1,200 gold. Strong cash flow, coupled with a precautionary drawdown of our credit facility, resulted in a cash balance of just over $1.1 billion with total available liquidity of $1.9 billion at the end of the quarter. During the quarter, we generated approximately $110 million of free cash flow, and our run rate in April was noticeably stronger than Q1. To elaborate, if gold prices for the remainder of 2020 averaged $1,700 per ounce, we would expect to generate free cash flow in excess of $700 million for the year. The current environment for gold energy, and foreign exchange is good for our business. Notably, the price of gold is at record levels in both the Brazilian real and the Russian ruble. If these currency levels persist, they can have a powerful impact on our cost structure and margins. For example, at Perica II, approximately 60% of our costs are in Brazilian real, which has depreciated by more than 25% year to date. Although we withdrew our 2020 guidance in recognition of the uncertain operating environment, we will continue to work towards the original targets. I'll now turn the call over to Andrea for a more detailed review of our financial results.

Thanks, Paul. I'll begin with a few financial highlights from the quarter, review capital expenditures, and end with a summary of the balance sheet. During Q1, we produced approximately 567,000 attributable gold equivalent ounces at an average cost of sales of $754 per ounce and an all-in sustaining cost of $993 per ounce. Our average realized gold price was $1,581 per ounce in Q1, up 21% from last year, and we achieved a margin of $827 per ounce, up 33% compared with the same period last year. During the quarter, we sold approximately 15,000 ounces of gold fewer than we produced, largely due to the impact of the pandemic on timing of metal shipments to refineries. However, this was higher than our previous sales estimate noted on April 1st, due to favorable timing of sales, principally from Bald Mountain. Our adjusted EPS of $0.10 and adjusted operating cash flow per share of $0.33 were both up compared with the first quarter last year. Adjusted operating cash flow was $419 million versus $231 million last year. And as Paul mentioned earlier, free cash flow during the quarter was approximately $110 million, which is in line with the fourth quarter. We expect free cash flow for each of the remaining quarters of this year to be higher, depending on gold prices and other external factors. Specific items that affected our quarter end cash balance included our $100 million revolver repayment in February, and then the subsequent $750 million draw towards the end of March. An interest payment of approximately $50 million. The first payment on our tobacco acquisition, which was approximately $130 million. and a tax payment of approximately $44 million in Brazil, considerably higher than last year, reflecting Pericatu's outstanding performance and profitability in 2019. Turning to income tax, during the quarter, we recorded an expense of $45 million, compared with roughly $28 million in the first quarter of last year. You'll also notice our current income tax receivable on the balance sheet has increased by approximately 100 million compared with the end of 2019. This has two components, both of which relate to the US CARES Act that was passed at the end of March in response to COVID. First, we were initially expecting a US AMT refund of $33 million this year and have now increased that by an additional $33 million of AMT tax credit previously expected to be received after 2020. And second, New tax loss carryback opportunities have created additional expected tax refunds of approximately $60 million, which also benefit our adjusted operating cash flow. Capital expenditures during the quarter were approximately $191 million. In terms of CapEx going forward, we're not intentionally slowing expenditures. However, as global travel and flight restrictions remain in place, there may be a reduction in intended spend if we're unable to execute on portions of our plans. Looking forward on operating costs, there will be some puts and takes, including more favorable foreign exchange rates on the Brazilian real and Russian ruble and lower energy prices. On the other hand, higher gold prices will result in higher royalties. And of course, any future operating challenges associated with COVID may also have an impact. As Paul mentioned, we continue to prepare for a wide range of scenarios related to the pandemic. At this point, it is too early to accurately predict how these factors will affect the remainder of the year. Having said that, as currency exchange rates and energy prices have become more attractive, we look to incrementally add to our hedges. With relatively strong sales, a rising gold price, and a $750 million draw on our credit line, we ended the quarter with approximately $1.1 billion of cash and cash equivalents. Including a revolver draw, our total debt stands at $2.5 billion, and net debt is approximately $1.3 billion. On a trailing 12-month basis, our net debt to EBITDA ratio is 0.9 times. During the quarter, Moody's upgraded our credit rating to investment grade, which means Moody's, S&P, and Fitch now all rate Kinross's debt as investment grade. It's also worth noting our cash balance further increased in early April as we received our initial $200 million draw from the TAPIUS project financing. In summary, we're confident in Kinross' liquidity position today and believe we have a strong base to continue to fund our operations and projects through this uncertain environment. Now I'd like to turn the call over to Paul Tamori.

Thanks, Andrea. First of all, let's spend a few minutes discussing some of the key COVID-related initiatives and contingencies we've put in place. Then I'll move on to a summary of how operations are performing. We acted quickly with the establishment of our pandemic task force and took several immediate measures across the operations. There is minimal impact on our Q1 results, but there are likely to be minor challenges over the next few months. In the area of supply chain, our sites continue to review all key consumables and critical supply channels in order to assess potential disruptions and to identify mitigating actions, including finding alternative sources of supply. Where possible, we've been working to increase stock of key consumables to three months. The one obvious standout in the portfolio is Russia, where supplies come in once a year on a seasonal ice road. For this reason, Kupo and Devoin have roughly 12 months of inventory, including fuel and other critical items. While we effectively mitigated any material business interruption during the quarter, we could see some negative complications if current pandemic-related restrictions extend into the summer months. Now, moving to a summary of operations and projects. As Paul indicated, our three biggest producers continued a strong performance and accounted for 62% of first quarter production. PERC 2 is our largest producer and continues to see good results, reflective of the asset optimization program, which was completed last year. Recoveries were lower compared with previous quarters due to anticipated variations in ore characteristics, which accounted for the decrease in production compared with Q4. Recoveries are expected to improve as we move into higher grade ore in the fourth quarter of this year, and into 2021. Throughput was also lower in the quarter due to unplanned downtime to replace an apron feeder in one of the crushers in January. Importantly, cash costs of Parac2 were lower than Q4 as a result of our continued cost reduction strategy, improved productivity, supported by favorable currency. As a reminder, we filed a new technical report for Parac2 in March that outlined an increase in life of mine production by approximately 24% compared with the prior technical report from 2014 with average annual production of around 540,000 ounces from 2020 to 2031. Turning to Russia, Kublai and Dvorna continue to generate good cash flow. Despite some early suspected case of COVID, which ultimately tested negative, our Russian operations delivered strong production during the quarter, albeit a downslide from the entire period due to the mining of anticipated lower grades. We expect a return to grades more typical of what we saw in 2019 for the remainder of the year. At Chubacca, we remain very excited about the prospects of this developing asset as we completed 23,500 meters of infill, step out, and metallurgical drilling as of the end of the quarter. Metallurgical samples from phase one drilling are at the lab and results are pending. Assuming no impact from COVID, we expect to have 50,000 meters of new resource drilling ready for the resource model update at year end. The drill program for the remainder of this year will focus on step out and infill drilling for both high grade and growth confirmation purposes. This near-surface heap leachable deposit has an initial resource estimate of approximately 4 million ounces and has highly continuous mineralization that is open along strike and at depth. The 2020 exploration program also includes $10 million for more distal step-out drilling in a highly prospective and underexplored 120-square-kilometer license area. We remain excited about the future of Chula Khan and look forward to sharing more detailed results with you later in the year. Moving to Taddeus, not only was 2019 a record year, we had another record quarter in Q1. The lowest cost producer for the quarter set a new production record of over 103,000 ounces. TruePort also had a second consecutive record quarter, averaging over 16,000 tons per day during Q1, despite the restriction on moving people in the second half of March due to COVID-related government mandates. We expect to transition to the processing of stock ground material in late Q2, which will result in lower grades being delivered to the mill during the second half of the year. The 24K project continues to progress well. While the project currently remains on schedule to increase throughput to 21,000 tons per day by the end of 2021 and then to 24,000 tons per day by the mid 2023, timing could be challenged by constraints on the global movement of people and supplies caused by prolonged COVID-related travel restrictions. Finally, on TASIUS, as you all seen in our press release yesterday, A notice was filed by Tassie's labor delegates and a strike action was initiated by a majority of the workers at the mine. As a result, we have temporarily suspended non-essential activities at the site while we work to resolve this untimely dispute. The issue at hand is the quantum of the premium being paid to employees who are working longer than normal rotations due to government-mandated COVID-related travel restrictions. In addition, delegates have attempted to reopen terms of the three-year collective labor agreement negotiated in the fall of the last year. The company remains open to discussion with the union representatives to resolve the situation. There have been four short-starts of tattoos since the operation began, with the average length of these labor actions being approximately nine days, and none have had a material impact on the company. We are disappointed the delegates have opportunistically undertaken a stray action during the COVID pandemic. However, we are optimistic this will be resolved. We understand also that the labour inspector passed on a request from the labour minister that the delegates suspend the strike action given the backdrop of COVID. Moving to our US operations, Round Mountain delivered a strong quarter for production and costs, although production was slightly lower than the previous quarter due to lower grades. At Bald Mountain, production decreased as a result of fewer tons stacked than planned in the previous quarter, combined with lower recoveries due to pH control issues. We have these under control now, and our stacking rates have rebounded. Additionally, we worked through some temporary logistical challenges associated with busing employees to and from the site while adhering to our strict social distancing protocols. However, logistical challenges may become less of an issue moving forward as the U.S. appears positioned to begin lifting some restrictions. At Fort Knox, we experienced higher than planned costs due to increased rates of waste mine and impacts from COVID. We have largely worked through the geotechnical, water management and heat kinetic issues of the past several quarters and expect more reliable performance going forward. The Gilmore expansion project remains on track as all critical materials and equipment have been purchased and are at site and almost all key contractors have been mobilized. Moving to Ghana, Toronto has been a strong cash flow contributor to the company and with recent additions to reserves, we anticipate it will continue to do so. However, As we extend mine life, we are getting into extensions of the main ore bodies, characterized by narrower veins, more variations and slightly lower grades, and requiring multiple headings. As a result, Toronto's cash costs will likely increase versus what we've been seeing for the past few years, but the asset will still produce cash flow at our mine planning gold price of $1,200 per ounce. For the quarter, Toronto was impacted by lower grades and by greater than anticipated mining dilution, which resulted in higher cash costs versus the same period last year. And lastly, finishing off with our Chilean projects. At La Coipa, the workforce ramp up to begin stripping is being challenged by limitations placed on people movement within Chile as part of the country's COVID response plan. And as a result, first production is expected to be delayed by approximately three months to the middle of 2022. At Lobo Marte, our PFS is nearing completion, and we expect to be able to release the results early this summer. To wrap up, our operations, exploration, and projects, our priorities continue to be the health and safety of our employees, 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.

Thanks, Paul. To conclude, while the world continues to work through this pandemic, as a company, we have come together with our employees and our local communities to work together to mitigate the impacts of COVID. I'm proud to say that our employees remain safe and all of our sites remained operational during the quarter. This would not have been possible without the good relationships we have with our suppliers, communities, and host governments. I'd like to thank our employees who, despite their own challenges, have stepped up and enabled Kinross to manage through this situation. And even with the impacts of COVID, we feel we delivered a good quarter Our projects continue to advance, and we remain in a very strong financial position. With that, operator, can we now open up the call for questions?

Thank you. Yes, sir. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. And once again, if you would like to ask a question, please press star then 1. We do have a question from Jackie Problowski from BMO Capital Markets.

Jackie Problowski Hi, good morning. I was just wondering if maybe you could give us a little bit more color on the situation at Taziast. I mean, I know it's difficult for you. Is this impacting the project that you're working on there, the expansion, and do you have any idea how long this might last or if there's going to have to be any kind of other intervention, government intervention or whatever, in order to get the workers back on the job?

Well, I think I'll comment on the project side of it, but no, I think as I think Paul was trying to give some context. This isn't the first time we've had a situation like this. We are disappointed. It does feel opportunistic. But history would suggest these tend to be short-lived. And we'll work through it as we have in the past. Paul, maybe to comment a little bit more specifically as to the project side of it.

Yes, as of right now, the project remains unimpacted. Contractors associated with both the 24K project as well as contractors supporting the operations are not off the job. The project is continuing. However, depending on the length of the strike, there could be impacts, but that would come after likely the couple-week scenario. But as of right now, the project is unimpacted.

Thanks. And maybe it's a question for Andrea. On the liquidity side, I know you've drawn down some cash from your credit lines. How long do you expect that you'll hold that cash in your balance sheet? Or when do you think you'll be comfortable with the COVID situation or the global situation to bring that back down?

Thanks, Jackie. You know, we would expect to repay to 750 once we're comfortable, but enough uncertainty has lifted from this COVID environment. But it's just difficult to predict when that will be. I would say, you know, we haven't used those funds and we don't currently plan to. So it's just a matter of having enough time pass and being more comfortable that the uncertainty is lifted.

Yeah, this is a difficult situation to predict all around. I understand that. Thank you. That's it for me. Thanks very much.

Our next question is from Kerry Mercury of Canaccord Genuity.

Hi, good morning. You mentioned oil prices and FX rates. I'm just wondering, based on what you think that can do in the dollar per ounce basis and when we could see that

Sure, I would say, and I'll hand that off to Andrea, but we are getting a greater sensitivity on currency than oil right now because of some of the structural arrangements we have in place as it relates to oil. But Andrea, why don't you take a crack at that?

Sure. So we did see some benefit in Q1 related to currency and oil. Our forecast for the year based on, you know, current spot prices for FX and oil is somewhere in the range of $30 to $40 an ounce. So, you know, we're not 100% exposed to fluctuations in WTI. And I'd also point out that, you know, forward prices haven't dropped as significantly as the spot price.

Okay. And then maybe just on capital, capital in Q1 was relatively low compared to your previous guidance. I'm just wondering with COVID impacts, should we expect capital to sort of rebound back to more towards the guidance range, or do you think there's an opportunity to reduce that this year?

I can start, and then Tamori may want to jump in. What I'd say is the CapEx for Q1, it's not atypical for Q1 to be a little slower to ramp up on CapEx.

And, you know, we haven't withdrawn our guidance, but... And I'll add a couple points on the type of capex that's happening here. A large amount of our capital expenditures this year are stripping-related, and two impacts there that are moving capex down. One, of course, is the oil price, a large proportion of the stripping dollars associated with fleet movement. So there's an oil price impact. But in the case of a couple of our sites, Fort Knox and Tassius, our mining rates were impacted as a result of COVID-related restrictions, meaning we didn't have as many people at site as we would have liked, and so mining rates were lower in the second half of March. Some of those conditions persist, particularly at Tassius, so there might be a trend showing up on Tassius capital stripping that is lower than we would have planned. The other factor driving capital this year will be potential impacts to our large capital projects stripping aside. So, for example, La Coypa, we've already signaled a three-month delay on that project, primarily related to the inability to get a workforce ramped up to do the pre-stripping due to COVID-related restrictions. And so there will be some slide out of the capital at La Coypa from this year to next year. And the other one is TASI's, the project itself. We haven't signaled the delay yet, but should some of these restrictions, particularly around the ability to move Expat technical experts around the world, of course, right now, nobody's flying anywhere. Should those restrictions persist for a long period of time, we will see a slippage in the schedule of TASIUS and an associated pullout of CAPEX. So the way I characterize it is we're probably going to end up lighter than we had budgeted on CAPEX, but it's really too early to say where that number will land given some of the uncertainties that I've described.

Okay, and then maybe one last one on Tassius, the 16,000 tons a day. Is that a function of just how the mill's performing, or is there a bit of four hardness mix in that?

No, it's all about mill performance. The mill is doing exceptionally well. We're getting used to operating it at these higher throughputs, and what we're going to start to see over the coming months and quarters is continued incremental ramp-up in throughputs. as we start to complete elements of the 21K project for incremental debunking. But it's not primarily an order-related thing rather than really good performance out of that mill as we get used to running it. Okay. Thanks, guys.

Our next question is from Tanya Jackus-Connick of Scotiabank.

Yes. Good morning, everybody. Paul, just by continuing on that caveat you mentioned that, you know, should we – continue to see travel restrictions on expats persist for a long time, that we sort of will start slipping on that schedule. What is persisting for a long time? Are we talking a month here, or are we talking that we'd need to see by the end of this year? Just a time frame for what would cause slippage on that front.

If we were not able to get expats into Mauritania, say, by July, August, we would start to see at first weeks and then potentially months being added to the schedule. However, as I alluded to in the last question, there are certain elements. This project is not an all-or-nothing project. There are various debottlenecking stages. So, for example, we're right now working on a tailings booster pump that allows us to get rid of that bottleneck, be it bringing in new interstate screens. Those two elements will come online, really irrespective of So what if they get some incremental throughput outside? But to specifically answer your question, if we can't get expats to site by July, August, September, we're going to start to see some slippage in the project.

And in terms of other slippage, how are you doing on the pre-strip there? I mean, I would assume there's less people on site, maybe less people.

Yes, correct.

Yeah.

Yes, correct. So at TASIUS, our mining rate in the first quarter was not what we would have liked it to have been. To begin with, it was already a very aggressive mining rate as we dive for higher rate over in West French Four. But with the COVID-related restrictions, Mauritania had imposed more stringent restrictions on the local movement of people within the country, so we didn't have full crews. Those restrictions have now been lifted, but we were still behind our plan. So as I mentioned earlier to Kerry, we do see some lower capex as a result of that at TASIS. Now, what is the impact of that? The impact isn't huge because one way or another, we've got to mine it. At Tassius, we have eternal stockpiles. So should there be a delay of access to the next phase of high-grade ore out of the pit, it just means we have to subsist on these lower-grade stockpiles for a longer period of time. We're into those stockpiles anyway in the back end of Q2 this year. It would just mean that those stockpile periods are extended.

Okay. Thanks for that, Colin. And maybe just a higher level question. I appreciate, I mean, some of these things are fluid, so some may not have all of the answers, but when you look at what the productivity of your workforces have been with this COVID, would you say that your productivity is still intact?

Yeah, I think, yeah, go ahead, Paul. I think our people have stepped up, and go ahead.

Yeah, the productivity is we keep a very close eye on that. We do weekly COVID response meetings, and we do track productivities. We have some really good things. So for example, Paracouture just set a record 18 straight days without any downtime. It's the first time the site has done that length of a period of time. So we do see spotlights in the company where we're performing really well. But there will be an impact to productivity. So for example, at Bald Mountain, The crew buses that go down from Elko previously, you could put 55 people on one of those buses. Now you can only do 12. So if Nevada doesn't relax some of those restrictions, then, yeah, we'll start to have these little impacts for characterizing these paper cuts pretty soon. They start to add up to something that could be a little bit more material. But as of right now, though we have stresses on the productivity across the company, we're not terribly worried about them at this stage.

Well, that's good. And if I could just ask one last question, Mom. on just like the additional costs from COVID. I mean, it appears that they are being more than offset by the FX and oil tailwinds. Is that a fair comment?

Yes, absolutely.

Okay, great. Thank you and good luck. Thanks.

Once again, if you would like to ask a question, please press stars and one. Our next question comes from Anita Soni of CIBC World Markets.

Hi, good morning, everyone. Question just following up on the capital, but the free cash flow that you mentioned at current spot prices, I think you said $700 million for the year, that's assuming the full capital spend that you were originally guided to?

Yes, and the existing hedges in place, it's just continuing it out as per our budget this year, but just with that higher commodity price, yes.

Okay, and then just a second question on the capitalized interest. Is that a good go-forward rate, the $22 million that went through investing activities this quarter?

Andrea, do you want to take that one? Yeah, we've provided guidance on capitalized interest at the start of the year, so that still stands. But yeah, what you're seeing in the quarter is basically what you can expect for the year.

Okay. All right. Thank you. And we have no further questions at this time.

Okay. Well, thank you, Operator, and thank you, everyone, for joining us today. Keep safe, everyone, and we'll keep our heads down and keep running our business, and we're looking forward to getting on the other side of this and catching up with you all in the future. Thanks for joining us this morning. Thanks.

Ladies and gentlemen, thank you for joining us today. You may now disconnect.