Cameco gathers gold assets under Centerra

Higher gold prices have prompted Cameco (CCO-T) to bundle its gold assets into newly created Centerra Gold, and offer shares in that company.

Initially, Cameco will hold 67% of Centerra after transferring to the new company its one-third interest in Kumtor Gold (which owns the Kumtor mine in the Kyrgyz Republic) and other gold assets.

The Kyrgyz government currently holds a 67% interest in Kumtor Gold; it will relinquish that interest in return for a 33% interest in Centerra Gold. Cameco’s interest in Centerra will fall to 65% if the government exercises its option on an additional 2% of Centerra.

The Kumtor mine is in the Tien Shan mountain range, adjacent to China, and is slated to produce 610,000 oz. gold at an average cash cost of US$220 per oz. in 2004. At the end of 2002, proven and probable reserves stood at 25.2 million tonnes grading 4.27 grams gold per tonne, based on a gold price of US$300 per oz.

The open-pit operation is expected to continue until about 2008. A decision to switch to underground mining must be made two years before surface operations cease; otherwise rights to do so are forfeited.

The latest deal will also see Cameco contribute its 56% interest in Australian-based explorer AGR, which owns 95% of the Boroo gold mine, 110 km northwest of the Mongolian capital of Ulaanbaatar.

Construction at Boroo was 95% complete at the end of the third quarter of 2003; the first gold pour is expected during the first quarter of 2004. At full steam, Boroo is expected to produce 210,000 oz. gold at an average cash cost of US$170 per oz. Capital costs are estimated to be US$75 million.

At the end of August, Boroo had probable reserves of 10.3 million tonnes grading 3.52 grams gold. The estimate is based on a gold price of US$325 per oz.

Centerra will also hold a 73% interest in the Gatsuurt exploration licences, 35 km from Boroo, plus Cameco’s 62% interest in the advanced REN exploration project, 2.5 km north of the Meikle and Rodeo underground mines in Nevada’s Carlin trend. Barrick Gold (ABX-T) holds the remaining interest at REN. Centerra’s assets will include US$130 million worth of loans that Cameco previously advanced to the Kumtor and Boroo mines.

Cameco will continue to guarantee the 480,000 oz. gold hedged at both mines while Centerra establishes itself. The same goes for Kumtor Gold’s US$17 million in senior debt. The hedged ounces had a mark-to-market value of minus US$46 million at the end of 2003.

Essential to the deal are a series of agreements between the Kyrgyz government and Cameco, including a 10-year tax stabilization period, during which time taxes on the Kumtor operation cannot be increased. The tax indemnity previously granted to Cameco is not transferred under the new deal.

In return, the government will have one representative on Centerra’s board as long as it maintains a minimum stake in the company. It has agreed to do so for at least five years.

Another key to the transaction is Cameco’s plan to launch a public offering of an undisclosed number of Centerra shares, which it will seek to list for trade on the Toronto Stock Exchange. Cameco plans to retain a majority interest in Centerra. Non-Cameco shareholders of AGR will be offered Centerra shares in exchange for their AGR shares by early March.

Closing of the transaction, planned for the second quarter of 2004, is subject to an agreement for the public offering, conditional listing of Centerra shares on the TSX, and the consent of several third parties, including financial institutions.

Cameco had previously proposed to assume full ownership of Kumtor by converting the government’s interest into royalties. Higher gold prices have made retaining a stake in the operation a more lucrative option for the government.

Shares in Cameco, the world’s largest uranium supplier, closed $1.63, or 2%, higher, at $77.58 in Toronto following the news on Jan. 5.