Centerra and the Central Asian survival game

It hasn’t been easy, but Centerra Gold (CG-T) has managed to maneuver through the political turbulence of Kyrgyzstan and Mongolia and is now riding smoothly into 2010 on the back of some very profitable gold mines.

The company has been beset with problems in the two countries over much of the last five years.

Whether it has been illegal strikes in Mongolia or licence suspensions in Kyrgyzstan, Centerra’s has had to put up with a series of headaches in the two central Asian countries.

But a deal with the Kyrgyz government signed in April of last year and an improved investment climate in Mongolia — thanks in large part to the investment agreement signed between the government and Ivanhoe Mines (IVN-T) — has pulled the company out of the dumps.

The combination of political risk and lower commodity prices had hammered the Centerra’s share price through the latter part of 2008 with its shares closing as low as $1.05 in the fall of 2008 – a devastating drop considering that they began the year trading above $15.00.

Since those lows, however, its shares have been amongst the best performing gold mining stocks, and are now trading in the $12.00 range.

The agreement with the Kyrgyz government was, no doubt, the key to the company’s revival.

The deal led to Cameco (CCO-T, CCJ-N) removing itself as the largest stakeholder in Centerra which was originally born as spin-off of Cameco’s gold assets.

Cameco transferred 25.3 million of its Centerra shares to state-owned Kyrgazaltyn JSC then sold its remaining 88.62 million shares in Centerra for $10.25 per share.

Cameco had held as much as a 53% stake in Centerra, the government of Kyrgyzstan now has a 33% stake.

The re-arrangement has paid off huge for Centerra shareholders as it has allowed them to partake in the wealth of the company’s flagship Kumtor mine in Kyrgyzstan without fear of government interference.

The mine turned out record production in the quarter, at lower than expect production costs, and Centerra managed to bolster reserves significantly enough to extend the mine’s life out to 2019.

Proven and probable mineral reserves at the mine moved up 2.1 million oz. to 7.3 million oz. while fourth quarter gold production came in at 247,095 oz. at total cash costs of just $245 per ounce.

More production at lower costs in a high gold price environment was a boon to the company’s financials.

Centerra reported that fourth quarter revenue was up an eye-popping 104% over the third quarter to $324 million.

Such hefty revenues bode well for a company that has long had an exemplary balance sheet. Centerra ended 2009 with cash and short-term investments of US$323 million and no debt outstanding.

The company reported net earnings of US$140 million or 60¢ per share compared with US$61.4 million or 28¢ per share for the same period in 2008.

But while Kumtor is clearly the heavyweight in the company’s arsenal its Boroo mine in Mongolia is no slouch.

The mine also managed to increase its output thanks to the processing of higher grade material and higher recoveries.

Centerra says it expects to turn out between 640,000 to 700,000 oz. of gold for all of 2010 with total cash costs coming in around the $460 to $505 per oz. range.

For all of 2009 Centerra produced 675,592 oz. of gold at a cost of $459 per oz. – those figures beat its own revised guidance of 620,000 to 630,000 oz. but fell shy of 2008 production which tallied 748,888 oz. at a total cash cost of $423 per oz.