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TABLE OF CONTENTS May 26 - Jun 1, 2014 Volume 100 Number 15 - 0 comments

Centerra eyes lower costs going forward

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Falling gold prices and rising costs combined to take a bite out of Centerra Gold’s (TSX: CG) bottom line, although not to the extent analysts had expected.

While the consensus expectation amongst analysts was a loss of 5¢ per share, Centerra turned a slim profit of 1¢ per share. 

Adding to the positive news, the Toronto-based miner said it expects full-year all-in sustaining costs to fall below its previous guidance.

The drop in costs is attributable to its Boroo mine in Mongolia where lower operating costs, inventory adjustments and a reduced royalty helped push its guidance for all-in sustaining costs down to between US$857 and US$929 per oz., compared to its previous forecast of between US$989 and US$1,074 per oz.

Full-year production guidance remained unchanged at 595,000 to 645,000 oz. gold.

And while positive net earnings of $2.1 million were a surprise to most, the numbers don’t stack up well compared to it where it was this time last year when it generated earnings of $51.4 million, or 22¢ per share.

The fall in profit came despite the company turning out more gold. Centerra produced 116,669 oz. gold in the first quarter, which narrowly beat last year’s first-quarter total of 115,220 oz., but all-in sustaining costs rose as well, reaching US$1,109 per oz. compared to last year’s US$1,068 per oz.

While costs rose, the average price realized for its gold fell 19% to US$1,301 per oz.

The key contributor to higher costs were escalating processing expenses at its flagship Kumtor mine in Kyrgyzstan, as mining ore there required stripping more ice and waste.

But ice and waste aren’t the only concerns at Kumtor, as BMO Capital Markets analyst Andrew Breichmanas points out.

“Operations appear to be continuing on plan, but the focus is likely to remain on resolving outstanding issues with the Kyrgyzstan government,” Breichmanas wrote in his research note.

Operating in the country has been a challenge for Centerra. The latest obstacle is that it hasn’t yet received formal approval for its 2014 Kumtor mine plan from the government — that approval usually comes in the first quarter. Centerra says it is working with authorities to satisfy requests and concerns.

At Kumtor the encroaching Davidov glacier forced the company to build a buttress from run-of-mine waste material. It did so for no extra cost, and while the action slowed the glacier’s movement, it says it has to further monitor and study the situation.

Thankfully for Centerra, relations with the Mongolian government are on the upswing, as it has indicated to the company that its other key project in the country, Gatsuurt, could be designated a “mineral deposit of strategic importance,” which would clear the way for mine development.

With all the governmental negotiations it has been involved in, it is blessed to have a key asset that can see it through the slow movements of bureaucracies: cash.

“The company’s cash balance net of debt, as of March 31, 2014, grew US$10.5 million to US$436.4 million, or roughly $2 per share, providing some support while navigating government issues,” Breichmanas pointed out.

He rates Centerra as an “outperform,” with an $8.50 price target. 

At press time the company’s stock traded at $5.25 per share.

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A mill at Centerra Gold's Boroo gold mine in Mongolia. Credit: Centerra Gold
A mill at Centerra Gold's Boroo gold mine in Mongolia. ...

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