VANCOUVER — Centerra Gold (TSX: CG; US-OTC: CAGDF) sits in a relatively enviable position due to a healthy balance sheet and a promising development pipeline, and that’s music to the ears of newly minted executive Scott Perry, who stepped into the CEO position four months ago after serving the same role at AuRico Gold.
The company’s flagship Kumtor gold mine in Kyrgyzstan, 350 km southeast of the capital Bishkek, generated US$160 million in free cash flow last year, and while many competitors have struggled under heavy debt burdens, Centerra has US$542 million in cash and equivalents.
In 2015, Kumtor cranked out 520,700 oz. gold at all-in sustaining costs of US$814 per oz. Centerra dropped its cost per ounce by US$40 year-on-year due to a 10% workforce reduction, optimized mill flowsheet, lower diesel costs and favourable exchanges. Kumtor now hums along at nearly 16,500 tonnes per day, where it averaged less than 16,000 tonnes per day in early 2015.
Last year the company recorded net earnings of US$42 million, or 18¢ per share, which compares to a net loss of US$44 million, or 19¢ per share, in 2014.
“We know last year was a weak gold price environment, so seeing that type of cash flow humbles you pretty quickly … our asset quality and balance sheet really distinguish us from other companies,” Perry said during an interview.
“That’s an important element for us, since we have three advanced-stage development projects that we’re moving forward. You can advance with confidence because you have the funding abilities, and don’t have to rely on equity or credit markets. With the cash flow from Kumtor and our balance sheet, we can do it on our own,” he added.
The headline issue for Centerra over the past two years and more has been its relationship with the Kyrgyzstani government. The company was negotiating an agreement wherein Kyrgyzaltyn JSC would receive a 50% interest in Kumtor in exchange for its 32.7% equity interest in Centerra.
But the outlook appeared to shift in late December when Kyrgyzstan Prime Minister T.A. Sariyev indicated the government would defer negotiations on the restructured agreement.
“I visited the country at the end of January, and met with the Prime Minister and members of his government. I’d say that the restructuring negotiations in terms of our agreements have been laid to rest,” Perry said.
“They are now off the table. I don’t see it coming back into play because the company’s previous discussions were framed by much higher gold prices. Kumtor was materially more profitable at that time, so you can appreciate the valuation of the mine was higher. The punchline is basically math: a one-third share position in Centerra is worth a lot more than half of the mine,” he stated.
Centerra expects to produce between 480,000 and 530,000 oz. gold in 2016 at all-in sustaining costs ranging from US$877 to US$968 per oz. Kumtor will account for 100% of that total, though Perry hints the company could close in on construction decisions at a pair of advanced-stage assets in Asia.
In November, the Turkish government approved Centerra’s environmental impact assessment for its Oksut heap-leach operation. Assuming the company receives its final permits, the project is slated to pour first gold by late 2017.
The US$221-million operation would produce 110,000 oz. gold annually at all-in sustaining costs below US$500 per oz. Assuming a US$1,250 per oz. gold price, Oksut carries a US$240-million after-tax net present value at an 8% discount rate and a 42.5% internal rate of return.
“Honestly, Oksut is my favourite development project in the portfolio. I might be a bit self-serving in that assessment because it’s just such an easy mine to build. Also the site is in central Turkey, so we haven’t had any impact from the political risks in the Middle East,” Perry said.
“In terms of financing, we have a great balance sheet, but we’ve recently been getting attractive project financing terms from European domicile banks. These are facilities with interest rates ranging from 3–4%. That’s pretty attractive for the project, since it’s such a quick payback period,” he added.
Meanwhile, the Mongolian Parliament passed a resolution in early February wherein it set a state-ownership interest in Centerra’s Gatsuurt project at 34% — which is a step toward finalizing investment agreements that will set the stage for mine development.
Gatsuurt’s reserves total 17.1 million tonnes grading 2.9 grams gold per tonne for 1.6 million contained oz. at a 1.4-gram gold cut-off grade. Centerra is conducting drilling and engineering at the site to update technical studies and assess exploration upside.
“Our situation in Mongolia has really been de-risked with that announcement. We’re negotiating what I prefer to call a ‘stabilization agreement’ because we lock in all the elements we need to invest in the country,” Perry explained. “We have members from the Mongolian government coming out in the next couple weeks to advance discussions, and it’s moving forward well. We’re cautiously optimistic we get everything finalized mid-year, and then it’s another 12 to 18 months to gold pour.”
In terms of earlier-stage assets, Centerra entered into a fifty-fifty partnership agreement with junior Premier Gold Mines (TSX: PG; US-OTC: PIRGF) in mid-2015 on the 285 sq. km Trans-Canada property — including the multi-million ounce Hardrock gold project — in Ontario’s Geraldton-Beardmore greenstone belt.
Trans-Canada hosts total measured and indicated resources of 55.4 million tonnes grading 1.7 grams gold for 3 million contained oz. Hardrock accounts for 42 million tonnes of 1.47 grams gold for nearly 2 million oz.
“The joint venture in Ontario is a key element of our story. The reason I like the asset is the pure scope of the potential mine,” Perry said. “We’re talking about one of the largest undeveloped open-pit opportunities in Canada. That makes it a strategic asset, and it continues to get more attractive in the current Canadian dollar environment. There’s an upside afforded to us by the property package. It’s a great position in extremely promising exploration ground.”
Centerra made an initial cash contribution to the partnership of $85 million for its 50% interest. The company has investment commitments of $185 million to advance the project, with expenses totalling $17 million last year. In February the joint-venture partners submitted a draft environmental assessment to the provincial and federal regulators for initial review and comment.
Centerra shares have traded in a 52-week range of $7.06 to $7.39, and last closed at $7.33 per share. The company has 239.4 million shares outstanding for a $1.8-billion market capitalization.
“Many of our peers are carrying around a lot of debt, so their enterprise value last year was heavily impacted by balance sheet concerns. It is the beaten-up guys, the guys in distressed situations, that have bounced back early this year,” Perry said. “We’ve held our value through those tough times because essentially half our share price was cash. There has been a lot of market deterioration, and clearly our balance sheet can solve a lot of problems. So we’re always there to look at outside growth opportunities.”