Centerra breaks even in Q3, before US$18M hit at Kumtor

Centerra Gold's Kumtor gold mine in the Kyrgyzstan, 350 km southeast of the capital Bishkek, and 60 km north of the Chinese border. Source:  Centerra GoldCenterra Gold's Kumtor gold mine in the Kyrgyzstan, 350 km southeast of the capital Bishkek, and 60 km north of the Chinese border. Source: Centerra Gold

Centerra Gold (TSX: CG; US-OTC: CAGDF) has widened its third-quarter loss, but is reducing its annual cost guidance to reflect lower operating costs at its Kumtor gold mine in Kyrgyzstan. 

The miner has operated its flagship Kumtor mine since 1997, and started up its 10-year Boroo gold mine in Mongolia in 2004, both with much success.

President and CEO Ian Atkinson — who joined the firm in 2005 before taking the helm in 2012 — said Centerra entered Kyrgyzstan and Mongolia in the nineties, giving it a first-mover advantage in the relatively risky jurisdictions. “In both countries we have been early entries. We negotiated agreements with the governments to move the deposits forward, and were successful in doing that,” says Atkinson, who is retiring. On Nov. 1, former AuRico Gold CEO Scott Perry will step in as CEO, and Frank Herbert, who has been Centerra’s general counsel and corporate secretary since 2004, will become president.  

Despite the “potential challenging” third quarter, Centerra produced a “positive result,” BMO analyst Andrew Breichmanas comments. He had expected an adjusted loss of negative US3¢ per share, given the mine sequencing at Kumtor and the lead-up to the parliamentary elections. 

However, excluding the non-cash impairment charge of US$18.7 million on the goodwill of the Kumtor mine, the miner broke even. The charge resulted from lower gold prices and a higher discount rate to reflect the rising country risk. (There is no goodwill remaining on the asset.)

Including the impairment, Centerra posted a net loss of US$18.1 million, or US8¢ per share, compared to last year’s net loss of US$3.2 million, or US1¢ per share. 

During the three months ended September, work at Kumtor focused on waste stripping from cutback 17, while the mill processed mostly stockpiles. 

Despite mining less ore at nearly half the grade than in the same period last year, production rose 9% to 103,701 oz., owing to a 5% increase in tonnes milled and slightly higher recoveries.

Kumtor’s adjusted operating cost fell by a third to US$393 per oz. sold, while its all-in sustaining costs dropped 10% to US$1,000 per oz. sold. Centerra notes the cost for diesel, labour (as it reduced its workforce), and other consumables fell along with the exchange rates.

Meanwhile, the Boroo gold mine added 3,784 oz. from secondary leaching in the third quarter, compared to 15,527 oz., a year ago. The drop reflects the fact no milling occurred during the period and there were fewer ounces from heap leaching. Centerra plans to wind down leaching activities by year-end, but will keep the mill on standby for its nearby wholly owned Gatsuurt gold project. 

Consolidated production during the quarter totalled 107,485 oz. gold, of which Centerra sold 103,467 oz. at an average price of US$1,123 per oz. for US$116.2 million in revenue, down 14% from a year ago. All-in sustaining costs, however, slipped 4% to US$1,089 per oz., while after-tax all-in costs fell 10% to US$1,370 per oz. 

Centerra will reduce costs going forward. It has lowered the midpoint of its 2015 all-in sustaining cost and after-tax all-in cost targets by 7% and 10%to US$827–US$875 and US$1,110–US$1,164 per oz.

To reflect improved production results from Kumtor, Centerra has narrowed its full-year target to 505,000–535,000 oz., from 480,000–535,000 oz.

Centerra recently received approval for its 2015 mine plan at Kumtor and now intends to resolve the outstanding issues — including the mine’s revenue sharing, with the new Kyrgyzstan government. 

“I think we will be an important item on the parliamentary agenda to have the various matters around Kumtor brought to a resolution as quickly as possible,” Atkinson says. 

Despite the on-and-off tension around the mine, he highlights that over the past 18 years, Kumtor has only seen four interruptions, including three related to labour and one to a roadblock, which the government helped resolved.  

“The fact they got involved is that they want to see Kumtor operating just as much as we do, because we’re such a large part of the economy,” Atkinson says. Centerra is Kyrgyz’s largest employer and taxpayer, accounting for 8% of the country’s gross domestic product last year. Since 1997 to the end of 2014, the mine has produced more than 9.9 million oz. gold, and should until 2026. Around 2019 the company could look at going underground at Kumtor, Atkinson says. 

Meanwhile at Gatsuurt, Centerra signed a memorandum of understanding with the Mongolian government on the deposit. The cash-constrained government has agreed to a 3% specialty royalty in place of acquiring a 34% ownership interest in Gatsuurt, Atkinson says, adding that the agreement still requires parliamentary approval. Centerra has yet to release a production timeline at Gatsuurt.  

But it did make a development decision on its Oksut gold project in Turkey. Centerra expects to receive the final approval on its environmental impact assessment by year-end. Construction should start in early 2016, followed by production by mid-2017. 

Over its eight-year life, Oksut should produce 895,000 oz. at after-tax all-in costs of US$777 per oz. sold. 

Atkinson notes the Oksut project helps geographically diversify the company, along with its 50% interest in Premier Gold Mines’ (TSX: PG; US-OTC: PIRGF) Greenstone gold property in Ontario. 

BMO’s Breichmanas views Centerra as “one of the best performing intermediate gold producers in 2015, based on its strong balance sheet, stable dividend policy and measured diversification strategy.” He has a $7 target price and “market perform” rating on the stock.

Centerra ended the quarter with a US$537.4-million cash balance, and kept its quarterly dividend at C4¢ per share. 

Given its strong balance sheet, Centerra has the financial capacity to pursue M&A. “We are looking at other acquisition opportunities in either development projects, or potential production operations,” Atkinson reveals, noting the company’s preference for North America. 


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