Centerra revises Kumtor’s gold production

Centerra Gold (CG-T) recently saw its shares plunge 15% after cutting its production forecast for the Kumtor gold mine due to ice movement in the southeast section of the pit that will impede access to the high-grade SB zone.

Located in the Kyrgyz Republic, the company’s flagship mine is now slated to produce between 390,000 and 410,000 oz. gold. That’s down from the previous estimate of 575,000 to 625,000 oz.

On the news — announced on March 27 — Centerra shares plummeted to a new 52-week low of $12.65, before closing down $2.43 at $13.70.

The company explains that Kumtor’s output is contingent on maintaining the mining rates of the waste and ice in the pit’s southeast section so miners can gain access to the higher grade ore in the SB zone. Adding that material is only available for mining in late 2012 when it is exposed by cut-back 14A.

But thanks to a build up of ice and waste in the southeast section, exacerbated by the 10-day work stoppage in early February, the company has delayed stripping material from the cut-back as it clears up the area.

As a result, the company expects to push the cut-back to late 2013. This means production which was expected this year from the high-grade SB zone will be deferred until 2013-2015.

To partially mitigate the affect of the ice movement and the resulting output delay, Centerra plans to step up mining in the pit’s southwest portion to access part of the new reserves this September to provide better feed for the Kumtor mill.

Kumtor’s reserves — updated in early February — stand at 59.7 million tonnes grading 3.3 grams gold for 6.3 million oz. of contained gold.

While the company says it carrying further technical analysis on the impact of the ice movement on its life of mine plan, it cautions that its collective bargaining agreement expires at year-end and any work stoppage during the year could potentially prevent Kumtor from reaching its production.

(Miners went on strike in early February following a dispute over social fund deductions. Centerra estimates the settlement cost for 2012 is around US$4 million.)

However, Scotiabank analyst Trevor Turnbull told The Northern Miner in an email in early April that he doesn’t expect significant hurdles to the new guidance.

“Centerra is a very good operator and I do not anticipate it will have any problem with the snow, ice and waste removal. The problems it did have were the result of an unfortunate convergence of the work stoppage in the pit while the snow and ice were just beginning to thaw. Once the company is through the snow and ice later this year even a work stoppage would not have the same consequences it did this spring.”

He opines that Centerra was oversold on the revisions, and he has upgraded the stock to a “1-sector outperform,” maintaining a $23 one-year target price.

Turnbull had lowered his target to $23 from $26 per share, following the production revision in March.

Similarly, BMO Capital Markets analyst, Andrew Breichmanas, cut his target price to $22.50 from $25 on the news.

“The news highlights the challenging operating environment at Kumtor and the potential for underground development to improve consistency,” Breichmanas wrote in a note to clients.

The company expects initial underground production from Kumtor in 2013.