Centerra seals the deal in Kyrgyz Republic

Good news shines on Centerra Gold (CG-T) from the Kyrgyz Republic.

In short order, the company won both presidential and parliamentary approval for a new agreement between itself and the government with regards to its gold rich Kumtor project.

The company has been battling to finalize an agreement between itself and the government for over a year now — a process begun when a new parliament and new government refused to ratify an agreement the company had come to with the previous government back in August of 2007.

The new governing bodies allowed that agreement to expire last summer, leaving Centerra to turn to an international arbiter until negotiations 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 has born fruit, as all disputes were resolved and Centerra had won the government’s “full commitment to and support for Centerra’s continuing long-term development of the Kumtor Project.”

The new deal brings with it a new tax rate of 14% that replaces a more complex tax regime 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 surrendering another 25.3 million shares.

Cameco had held 53% of Centerra.

Centerra also agreed to make annual payments of 4% of its gross revenue against which all capital and exploration expenditures in the Kyrgyz Republic are credited, and the Kyrgyz Government will appoint a director to the company’s board

And while there were concerns over how long the Kyrgyz Republic’s parliament would take to ratify the agreement once it received government approval, the parliament proved to be incredibly efficient, signing on just six days after the government approval. 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 the company did have three licences taken in away last July.

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

But the signing of the deal will see the licences restored to Centerra.

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

Now all that is left for the deal to be finalized is the tying up of legal loose ends – in connection with past legal proceedings – and the signature of president. Centerra says it expects to have those elements finalized by May 25th.

The news come at a good time, as just a day earlier, on April 29, the company announced disappointing first quarter results.

Centerra suffered losses of US$20.3 million or 9¢ per share based on revenues of US$98.4 million – a significant drop from last years first quarter when the company reported earnings of US$23.7 million or 11¢ per share on revenues of US$112.7 million.

Lower revenues were a consequence of lower production. For the first quarter its two mines, Kumtor and Boroo in Mongolia, combined to produce 103,204 oz. of gold. While still an impressive number it falls short of the 120,395 oz. it turned out in the first quarter of 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 that resulted from the company needing 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.