Centerra’s shares jump on unexpectedly strong Q1

VANCOUVER — There are quite a few moving pieces at Toronto-based Centerra Gold’s (CG-T) flagship Kumtor gold mine in Kyrgyzstan. But despite some uncertainty, the company was able to register a strong first quarter that includes notable year-on-year gains in production and revenue.

Centerra has provided relatively broad production guidance for the year due to pre-stripping at Kumtor’s SB zone, and is addressing unexpected movement at its waste dumps and ongoing political dialogue with the Kyrgyz government over its mining agreements.

Company-wide, Centerra produced 115,200 oz. gold during the first quarter at operating cash costs of US$471 per oz., which is a sizeable year-on-year improvement from 72,500 oz. at US$686 per oz. during the same period in 2012.

Kumtor contributed 89,600 oz. gold over the first three months of 2013, while the company’s Boroo mine in Mongolia produced 25,600 oz. gold.

The production gain was driven by higher grades at Kumtor and Boroo, as well as Centerra having experienced a 10-day labour dispute at Kumtor during the first quarter of 2012 that lowered output. The company also resumed heap-leach activities at Boroo, which resulted in a strong quarter for the mine: Boroo’s operating cash costs dropped 41% year-on-year to US$535 per oz., due to a 116% increase in production.

Centerra’s quarterly revenue subsequently jumped 44%, or US$58.5 million to US$192 million, with earnings per share clocking in at US22¢, which soundly beat an average analyst estimate of US12¢ per share.

Cash flow from operations rose 188% to US$91 million, and the company finished the quarter with cash and equivalents totalling US$370 million. Centerra’s capital expenditures for 2013, excluding capitalized stripping, are estimated to be US$107 million, including US$75 million of sustaining capital and US$32 million of growth capital.

“Even at current gold prices, we have what we consider a good margin if you look at our total costs,” president and CEO Ian Atkinson says during an interview.

Centerra’s all-in cash costs for the quarter clocked in at US$1,327 per oz., compared to an average realized gold price of US$1,619 per oz.. It expects to produce 605,000- 660,000 oz. gold in 2013 at all-in cash costs of US$1,067 to US$1,164 per oz.

“It’s not a big concern for us at this point, and in terms of capital, it is largely capitalized pre-stripped,” Atkinson says. “A recent portion of that we already spent on new mining equipment, and the sustaining capital is primarily driven at maintenance at Kumtor to keep up our production rate. So we don’t have a huge burn or a debt to service, and we maintain those good margins, so I don’t see cash being an issue for us.”

An element that caught Centerra off guard was the earlier-than-expected movement of its Davidov Valley waste-rock dump, which began in mid-March. The company had anticipated the dumps would move down the valley as use mounted, but since the movement accelerated, Centerra was forced to vacate its administrative and maintenance buildings, as well as plan for a power line and substation move, earlier than it had anticipated.

“We already had the engineering work underway on the new infrastructure, so we have just had to expedite those plans and vacate the buildings earlier than expected. We don’t foresee any significant cost increase from that, we said the capital costs for the construction and power-line relocation were in our program, but there is some minor additional cost,” Atkinson adds.

Over the short-term, Centerra will use waste sites permitted under its current mine plan that are unaffected by the movement, but the company will need to work out a long-term waste-rock dumping plan with the Kyrgyzstan authorities. Centerra says an expedited approval of such a plan should not be a problem, though any delay or stoppage could result in problems at Kumtor.

According to Atkinson there have been no material changes regarding dialogue between Centerra and the Kyrgyzstan government, which wishes to revisit the company’s mining agreements. At Centerra’s recommendation the Kyrgyz government has hired independent international financial and legal advisors, with the next important date being June 1, when the Kyrgyzstan prime minister is expected to reveal to parliament the findings from a commissioned report on the Kumtor operation.

Shares of Centerra received a boost following news of its strong first-quarter results on May 8. The company jumped 18%, or 64¢ over two days, before closing at $4.15 per share at press time.

Centerra has traded within a 52-week range of $3.30 and $13.28 per share and has 237 million shares outstanding, for a $946-million press-time market capitalization.