Kyrgyz Government Goes From Cruel To Kind For Centerra

Good news is shining on Centerra Gold (CG-T, CAGDF-O) from Kyrgyzstan.

In short order, the company has won both presidential and parliamentary approval for a new agreement on its gold-rich Kumtor mine.

The company has been battling to finalize an agreement for over a year — a process begun when a new parliament and government refused to ratify an earlier agreement struck in August 2007 with the previous government.

The new governing bodies allowed that agreement to expire last summer, leaving Centerra to turn to an international arbiter until relations with the government improved.

Last August, some positive signs emerged when the company said it would drop its arbitration case and continue to negotiate directly with the government.

On April 24, the company announced that those negotiations had borne fruit, as all disputes were resolved and the government’s “full commitment to and support for Centerra’s continuing long-term development of the Kumtor project” had been won.

The new deal brings with it a new tax rate of 14%, replacing a more complex regime with rates that ranged between 29.3% and 51.3%.

Other key elements of the deal will see Centerra pay the government $22.4 million in tax and liability charges.

As anticipated, the government will also take a greater stake in the company than its current 16% position. Centerra will issue 18 million shares to the government, with Cameco (CCO-T, CCJ-N) surrendering another 25.3 million shares.

Cameco currently holds 53% of Centerra.

Centerra also agreed to make annual payments of 4% of its gross revenue, against which all capital and exploration expenditures in Kyrgyzstan are credited; in addition, the government will appoint one director to the company’s board.

And while there were concerns over how long the Kyrgyz parliament would take to ratify the agreement, once it received government approval, the parliament proved to be incredibly efficient, signing on just six days later. It was the first time the Kumtor arrangements have been voted on or approved by parliament.

Throughout the negotiation process, mining at Kumtor continued uninterrupted, although three licences were taken away from the company last July.

Of the three, the one known as Sarytor was the most important as it had proven and probable reserves of 300,000 oz. gold. The other two were the southwest licence — which has already been mined out — and an exploration target.

But under the deal, the licences will be restored to Centerra.

Kumtor sits 350 km southeast of the capital Bishkek and has been in operation since 1997. Last year, 4.9 million tonnes of ore were mined with an average head grade of 3.9 grams gold per tonne for production of 556,000 oz. at a cash cost of US$517 per oz.

Now all that is left to finalize the deal is for legal loose ends — connected with past legal proceedings — to be tied up, along with the signature of the president. Centerra says it expects to have those elements in place by May 25.

The news came at a good time, as the company also announced disappointing first-quarter results at the end of April.

Centerra suffered losses of US$20.3 million or US9¢ per share based on revenues of US$98.4 million — a significant drop from last year’s first quarter when the company reported earnings of US$23.7 million or US11¢ per share on revenues of US$112.7 million.

Lower revenues were a consequence of lower production. For the first quarter, the company’s two mines, Kumtor and Boroo in Mongolia, combined to produce 103,200 oz. gold. While an impressive number, it falls short of the 120,400 oz. produced in the same quarter last year. Total cash costs were also higher at US$871 per oz., compared with US$610 per oz. a year earlier.

Much of the cut to production came because of lower head grades at Kumtor, a result of having to mine ice and waste rock near the central pit. The situation hit the bottom line in two ways: the need to accelerate mining of the ice and waste increased operating costs, while lower head grades failed to generate offsetting cash flows.