Good morning. My name is Kristina, 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. All participants are in a 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 1 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 all four 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 two of this presentation, our news release dated November 6th, 2019, the MD&A for the period ended September 30th, 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, 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 remained strong, highlighting the benefits of the phase one expansion. At Paracatu, throughput and recovery continued to be very strong.
Production, as expected, was lower compared with the record that the mine achieved in the second quarter. Together, these three 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 nine 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 two 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 three-year collective labor agreement. We filed an updated technical report last week. 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 is 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 an initial six-year mine life with first quartile all-in 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, 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 chaired by the Prime Minister. 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 Vantage and 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. 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 nine 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 cost. With cost of sales averaging $692 per ounce for the first nine 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-$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 one 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 nine months have been strong operationally, and importantly, we remain on track to be one of the safest operators in our sector. This was a significant quarter in terms of advancing our project development pipeline, a key achievement being the completion of our Nevada projects. Construction commissioning were concluded at Phase W in Vantage, and the projects have been handed over to their respective operations teams. Significant stripping activities at 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 the full pad late in the third quarter.
Since early September, daily ounce production has steadily increased. We expect an improvement in production and cost 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 pads 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 than anticipated on the north dedicated pad, which is the new pad built as part of Phase W. We've now completed that mitigation work and have ramped up stacking rates. We expect to see increased production in the fourth quarter.
Moving on to our Fort Knox mine in Alaska, the Gilmore project continues to proceed on budget and on schedule. Heap leach construction and dewater activities planned for 2019 are now complete and will recommence in the spring of 2020. Stripping for the initial project pushback commenced in the third quarter. 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. 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 the record high production in Q2. In Q3, we reverted to mining slightly lower grades, more in line with life of mine numbers. Throughput and recovery have been higher for three 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 costs 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. 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. It is available on our website. Detailed engineering is 65% complete. 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 increased throughput to 21,000 tons per day by the end of 2021. Then to 24,000 tons 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 in Ghana, lower throughput was the main contributor to lower production quarter over 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 mines 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 PFS early next year, and we plan to share the results in February. The Lobo-Marte PFS is progressing well, is on track to be completed in the middle of 2020.
Together, these studies are evaluating the 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. 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 eight 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 realize 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.
At this time, I would like to remind everyone, in order to ask a question, please press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A. Your first question comes from Greg Barnes from TD Securities. Your line is open. Please go ahead.
Thank you. Paul Tomory, on Paracatu, you talked about higher throughputs and lower costs. What are you planning to do there?
Okay, we have been, for the last nine months, outperforming our expectations primarily on throughput and recovery. On throughput, at a given hardness, we're beating the throughput curve by 6%, 7%, 8%, 9%, 10%, depending on the month. We've now been achieving that for, like I said, the last three quarters. As a result of that, the mill has pulled ahead of the mine. The mine is performing on target, as a result of the sustained throughput outperformance, we're actually going to add some fleet so that we can continue mining in the relatively higher grade portion of the ore body. It's a good news story, and what it'll allow us to do is to solidify Paracatu production in the annual range of the mid-500s for the next few years.
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'll drop it accordingly.
Yeah
with a denominator impact.
Any-
I mean, Paracatu is truly outperforming right now, and we're really happy with that performance. Like I said, we're adding a shovel and three trucks, and that'll help us to have the mine keep up with the mill.
Okay. What mill throughput rate are you talking about?
It depends on where we are with hardness, but we're looking at 150 tons-160,000 tons a year.
A day?
A day. Yeah, sorry.
Yeah. Okay. Okay, that's great. Andrea, the project finance proceeds, the $300 million, are there restrictions on what you can do with that?
No. We expect to draw about half of it on closing, and then the remaining half will be drawn, we expect probably in 2020. No, we don't have restrictions on what to do with that money.
Can you pay down debt or other debt, I guess?
Yeah, we can repatriate that cash sort of up the chain and use it to, wherever.
Yeah.
Okay, great. Thank you.
Again, if you would like to ask a question, please press star, then the number 1 on your telephone keypad. Your next question comes from Carey MacRury from Canaccord. Your line is open. Please go ahead.
Hi, good morning. Just have a couple questions on CapEx. You mentioned expecting to be at the high end of the range for this year. 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.
Yeah.
We're just going to be towards the high end of guidance. Again, I think that's a good news story. We have capacity, and we have new opportunities, and we're addressing that, and that's what really is driving us towards the higher end.
Just to be more specific on this, Andrea mentioned this, the two real components that'll 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. 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 think, I guess the point being, we weren't accelerating stripping until we made a decision.
That's right. 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 and 24, 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. In effect, we're doing a bit of a catch-up on a few years of slightly slower than optimal stripping.
Carey, the math is, the guidance is $1,050 ±5%, so that puts you close to the $1.1 billion on the high end of the range.
Okay. 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 on that?
Yeah. We're just getting into our budget cycle right now. We'll share guidance in February for 2020. As you said, we've got the two new projects, Tasiast and Chulbatkan. We still have some continued stripping at Round Mountain for Phase W. All in all, we'd expect to be probably slightly below where we were this year.
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?
We're definitely getting into production for Vantage this quarter, and we saw it already in October. Production in Q4 will definitely be better than what we saw in Q3. That'll have ebbs and flows. We expect a better year next year at Bald.
Good quarter.
Okay. Great. Thank you very much.
Yeah, we expect a good fourth quarter at Bald.
Your next question comes from Steven Butler from GMP Securities. Your line is open. Please go ahead.
Well, good morning, everybody. Round Mountain and Bald Mountain, maybe just to come back to those again, Paul. It is more a poking around. Remind us again of the leach curve at each of those mines. How slow or rapid is it in terms of % gold after so many days, if you have that off the top of your head?
I don't have the exact numbers off the top of my head, but what we've struggled with at both sites over the last quarter is in the case of Bald, stacking rates weren't what 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 were seeing in Q3. In the case of Round Mountain, 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 for the specifics of the leach curve, we can follow up with you later on that one.
That's fine, Paul. Actually your tons stacked were actually a very good number at Round Mountain.
They were, but they weren't as high as we were hoping. They should've been higher.
Right. Okay. Should be even higher than that. Okay.
Yes.
Thanks, Paul.
Yeah.
Thank you.
Your next question is from Tanya Jakusconek from Scotiabank. Your line is open. Please go ahead.
Yes. Good morning, everybody. Thanks for taking my question. Paul T, we were just talking about Bald Mountain and Round Mountain. 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.
Okay.
We had a great October at both assets.
Okay. That's good news. What about Fort Knox? I didn't see anything in the press release. Are we continuing to anticipate a better Q4 at that asset?
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 relatively minor slope failures. What we've had to do is step out the mining to accommodate for it. There is a delay in access to some mill ounces, but we expect next year to be more in line with expectations in what we had in our technical report.
Okay, maybe not a pickup in Q4.
There might be a slight pickup in Q4, but it'll be roughly in line.
Okay. Thanks for that. 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 ton going to persist in Q4?
Just a quick description and a reminder of the Paracatu ore body. 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. The acceleration of the mining rate allows us to keep diving into the area of more consistent and better grades. Largely speaking, with the approval of the purchase of these trucks and the shovel, we expect that we'll be mining slightly higher grade material. 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.
Mm-hmm. Okay. I guess better than we had expected from originally the start of the year.
That's right, definitely.
Yeah.
With the acceleration of the mining rate, we will keep ourselves in better grade material for at least the next two, three years.
Okay. Yeah, that's good. Well, it's good to see. Thank you.
Yeah.
Again, if you would like to ask a question, please press star then the number one on your telephone keypad. Our next question comes from Mike Parkin from National Bank. Your line is open. Please go ahead.
Thanks for taking my questions, guys. With Paracatu, do 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. 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. In the past, 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 the water. As you know, we invested over the last two, three 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. Having the mitigation does give us some flexibility.
Yeah. 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. With Chulbatkan, obviously the exploration results that were put out with the announcement of the deal were pretty exciting. When could we expect, obviously you're looking to close that in the first quarter, would we be getting any kind of update in the second quarter, third quarter?
Yeah, look, I think we're chomping at the bit to get this thing closed and get to work. 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 PFS and feasibility studies. We're very excited.
Great. All right. That's it for me. Thanks very much, guys.
Thanks, Mike.
There are no further questions at this time. I turn the call back over to the presenters.
Thank you, Kristina, 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.