Centerra earnings shrink on Kumtor performance (March 06, 2006)

Lower head grades at the Kumtor gold mine in Kyrgyzstan increased production costs at Centerra Gold (CG-T, CAGDF-O) in 2005, leaving the gold miner with net earnings of US$42.4 million (US59 per share) on revenues of US$338.6 million.

Increased gold prices and higher production from the Boroo gold mine in Mongolia cushioned the effect, but earnings were considerably lower than in 2004, when the company posted a profit of US$50.6 million on revenues of US$245.4 million.

Total cash costs — operating costs plus royalties — increased to US$241 per oz. in 2005 from US$187 the year before, largely on the back of an increase to US$274 at Kumtor, US$74 higher than in 2004. Production at Kumtor fell to 501,000 oz. from 657,000 oz., as mill head grade dipped to 3.4 grams per tonne from 4.4 grams a year ago.

At Boroo, production increased to 286,000 oz. from 218,000 oz. in the 10 months it was in production in 2004. Total cash costs rose to US$183 per oz. from US$149.

Centerra had US$305 million in current assets, including US$202 million in cash, at year-end.

Centerra significantly increased the reserve at Kumtor thanks to a mine-site exploration program. Newly defined high-grade mineralization in the SB Zone, at the south end of the Kumtor pit, increased the Kumtor reserve to 40.2 million tonnes grading 3.8 grams gold per tonne at year-end. At the end of 2004, Kumtor’s reserves were pegged at 31 million tonnes grading 3.3 grams per tonne.

Kumtor’s measured and indicated resources are also up significantly, with the new figure (exclusive of reserves) at 24 million tonnes grading 3.9 grams per tonne, compared with 17.6 million tonnes grading 3.4 grams per tonne at the end of 2004. Inferred resources at Kumtor were calculated at 5.5 million tonnes grading 4.6 grams, down from 2004, reflecting an upgrade of inferred resources to indicated.

Two other holes drilled on the SB Zone since December intersected mineralization downdip from the known resources. Hole D1030A, drilled to test below the pit outline at its extreme southwest, intersected 46.9 metres grading 5.1 grams gold per tonne. Hole D1039A, drilled about 120 metres east, cut a 71-metre length that averaged 10.1 grams per tonne.

The government of Kyrgyzstan has issued the company a mining licence for the Southwest zone at Kumtor, completing the permitting process for the project.

The Southwest zone, at one end of the existing Kumtor pit, has a probable reserve of 2.8 million tonnes grading 3.2 grams gold per tonne. The licence will allow Centerra to bring Southwest zone reserves into production sometime this year.

The process at Kumtor contrasts with the experience of two other companies working in Kyrgyzstan — London-listed Oxus Gold (OXUSF-O, OXS-L) and Toronto-listed Central Asia Gold (CGA-T, CGXAF-O). The government has annulled mineral licences for properties held by Oxus and Central Asia, claiming that the companies have not moved fast enough to develop the projects.

Oxus had continued construction on its Jerooy gold project near Talas in the northwestern part of the country, despite a year-end decree signed by Kyrgyz Prime Minister Felix Kulov instructing state agencies to review the existing development agreement and, if necessary, find a new developer for the project. The property had been owned by an operating company in which the government, through state agency Kyrgyzaltyn, had owned 33% and Oxus 67%.

Oxus said it regarded the move as an expropriation, based on an opinion from a Kyrgyz parliamentary committee. It has since suspended construction and filed notice of dispute under four agreements — bilateral investment treaties between Kyrgyzstan and both Britain and the United States, the Kyrgyz business investment code, and Kyrgyzaltyn’s joint-venture agreement with Oxus. The company said that it would take the disputes to arbitration if negotiations did not start soon.

Recent statements from the prime minister and the Industry Ministry maintain the hard line on Jerooy, with the prime minister insisting on Feb. 15 that “there are no reasons to reinstate the licence.”

The licence flap has reached the level of an exchange of letters between British Prime Minister Tony Blair and the Kyrgyz President, Kurmanbek Bakiyev, with Foreign Minister Alikbek Dzhekshenkulov making the diplomatically unusual comment that Blair “was not fully briefed by his civil servants before writing to our president.”

Almazbek Djakypov, president of Kyrgyzaltyn, attacked Oxus for not sticking to agreed schedules, telling the Dow Jones news service that “Oxus has a brilliant opportunity to demonstrate its expertise, but it failed to do anything at all until the price of gold started to rise.”

The government also annulled the licence for Central Asia Gold’s Taldy Bulak project, west of Lake Issyk-Kul, after Kyrgyzaltyn withdrew from the joint venture there. Kyrgyzaltyn claimed that Central Asia was in default of their November 2003 joint-venture agreement; Central Asia said Kyrgyzaltyn had not taken an October 2004 variation agreement between the partners, which changed the development schedule, into account.

Central Asia is seeking meetings with the government.