VANCOUVER — Despite relatively weak earnings resulting from a seven-week shutdown at its flagship Kumtor gold mine 60 km south of the Chinese border in the Kyrgyz Republic, Canadian producer Centerra Gold (CG-T) found a lot to celebrate during its third quarter results. The company finalized an updated mine plan to expand open pit operations and added significantly to Kumtor’s in-pit gold reserves.
Centerra reported a net loss of US$47 million during the quarter, including US$19 million in abnormal mining costs associated with pre-stripping and de-icing a portion of its pit. According to president and CEO Ian Atkinson, the company made a conscious decision in late March to move around 50 million tonnes of ice to assure safe mining conditions and, as an upswing, was able to look at an opportunistic pit expansion.
Consolidated gold production for the quarter clocked in at 42,700 oz. of gold at a cash cost of US$1,400 per oz., though the company had foreseen the drop-off on the back of the revision in its mine plan and associated operational delays. As a result, annual production guidance at Kumtor dropped from roughly 460,000 oz. gold to around 420,000 oz. gold.
Production was also impacted by a second operational setback in October. Centerra had expected to be accessing full ore by September and generating cash flow from Kumtor by October, though inconsistencies in till interfacing caused further operational delays.
“There were actually issues with ice movement in the northeast wall, though we actually got down on schedule. In this part of the pit, it is actually ore that we hadn't exposed before, and part of it is ounces we added during drilling last year,” Atkinson comments during an interview, explaining that Centerra was dealing with resource drilling from surface at forty to sixty metres spacing. “It is a glacial region and due to the undulations it can be fairly irregular, so in order to get a more solid prediction we would have needed a much higher drilling density.”
Atkinson points out that the company is now operating under normal conditions on the bedrock and can rely on a model it has used successfully over the past five years at its SB zone to assure reliable mill feed.
As a result of successful drilling, Centerra increased total open pit reserves by 58% to 93 million tonnes grading 3.3 grams gold per tonne for 9.7 million contained oz. The added ounces extend Kumtor’s life by roughly five years, and when combined with a higher gold price allow Centerra to move forward with a super-pit option.
“It is really a combination of a rising gold price and that successful exploration program that has allowed us to move to the full open-pit model and away from the hybrid idea where we were going underground,” Atkinson says, commenting on how variables have changed since developmental decisions were made at Kumtor six years ago. “We've expanded the SB zone significantly and have that much bigger resource, when you combine that with the rise in gold prices it changes the direction quite a bit.”
Under Centerra's expanded life-of-mine pit analysis, Kumtor now has a 14 year life and will produce an average of 650,000 oz. of gold per year. The company estimates "all-in" costs — including revenue-based taxes payable to the Kyrgyz government — at US$917 per oz. A mill expansion is planned in 2016 that will see throughput levels jump 18% to roughly 18,400 tonnes per day.
Expansion capital will total US$169 million, with sustaining capital clocking in at US$557 million and pre-stripping capital totaling US$1.7 billion. The plan carries a US$1.9 billion net present value at an 8% discount rate and generates roughly US$3.5 billion in free cash flow over life of mine.
Centerra will have to swallow roughly US$190 million in committed underground capital to move forward with its pit expansion. The company retains a high-grade inferred underground resource at its Stockwork and SB zones — totalling 5.2 million tonnes grading 11 grams gold for 1.8 million contained oz. — which is available for future development.
“The only way to really do it is to wait for that expansion at the SB zone and attack it directly from the bottom of the pit,” Atkinson explains, stating the company can work on inferred resource programs from surface, but will need to wait until it can access the underground to graduate those resources to measured and indicated categories. “So an upswing of this is it buys us time to work on the underground mineralization and define a resource and economic parameters that really work.”
Due to an intensive capital year at Kumtor, Centerra opted to draw down US$74 million from a US$150-million revolving credit facility during the third quarter. According to Atkinson, the move was triggered in response to the shut-down period at Kumtor's milling facility and allowed the company to complete all necessary work during the interim.
"We knew we'd be back into ore by September and start generating revenue in October. We also knew we had union negotiations coming up, as well, so it was just the right thing to do to assure we had the liquidity. Our cash balance will be back up by the end of the year and, going forward, it should be very positive," Atkinson points out. “Our employees, on a relative basis for the country, are very well paid. We're looking at nearly ten times the national average. We think that's manageable going forward, so we don't see big inflationary pressure coming out of the negotiations.”
Labour negotiations are one socio-political uncertainty Centerra will be dealing with going into the New Year. The other involves an ongoing review of the company’s operations by the Kyrgyz government — after a Parliamentary challenge by an opposition party, member saw Centerra’s right to operate brought into question. Atkinson says the report has been delayed slightly and is now expected to be delivered to Parliament by mid-November.
“That's the way it can be in these relatively young democracies,” Atkinson comments. “They tend to bit a more fractured politically as far as factions are concerned. The process or system in a place like Kyrgyzstan allows any Parliamentary member to request a commission, and they can put it together and can investigate pretty much anything.”
Centerra rose 1.9% or 20¢ following its third quarter results. The company has traded within a 52-week range of $6.17 and $22.40 and closed at $11.01 at the time of writing. Centerra has 236 million shares outstanding and maintains a $2.5 billion press-time market capitalization.
“I think most of the people who follow our stock understand the story, so I suspect a lot of that is behind us. The political issue is still out there, and again people are aware of that, but it is an unknown,” Atkinson concludes.
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