Surviving Central Asian Political Risk, Centerra Style

Centerra Gold (CG-T, CAGDF-O) has never shied away from taking on political risk if it meant securing profitable mines.

The company, which stands as the largest Western-based gold producer in Central Asia, has manoeuvred through the political turbulence of Kyrgyzstan and Mongolia in recent years and is now riding into 2010 on the back of some very profitable gold mines.

Whether it has been strikes or licence suspensions, Centerra has weathered situations that would spell the end for many gold miners.

But a deal with the Kyrgyz government signed in April of last year and an improved investment climate in Mongolia — thanks largely to the investment agreement signed between the government and Ivanhoe Mines (IVN-T, IVN-N) — has the company in the best shape its been in since- Cameco (CCO-T, CCJ-N) first created it as a spin-off of its gold assets in 2004.

It’s been a long road back to market respectability, however, as such political risk and lower commodity prices hammered the company’s share price through the latter part of 2008. Its shares closing as low as $1.05 in the fall of that year — a devastating drop considering that it began the year trading above $15.00.

Since those lows, however, Centerra 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 removing itself as the largest stakeholder in Centerra by transferring 25.3 million of its Centerra shares to state-owned Kyrgazaltyn JSC. Cameco then sold its remaining 88.62 million shares in Centerra for $10.25 per share.

The uranium giant had held as much as a 53% stake in Centerra, but the government of Kyrgyzstan now stands as the largest single investor with a 33% stake.

The re-arrangement is paying off for Centerra shareholders in that it has allowed them to partake in the wealth of the company’s flagship Kumtor gold mine in Kyrgyzstan without fear of further government interference.

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

Proven and probable 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 US$245 per oz. gold.

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 US$324 million.

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

As for net earnings, they came in at 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 the heavyweight in the company’s lineup, the Boroo mine and its complementary deposit, Gatsuurt, in Mongolia is where the intrigue lies these days.

While the economics of Boroo are good — the mine managed to increase its output in 2009 thanks to the processing of higher-grade material and higher recoveries — however, the politics around the mine haven’t been completely ironed out.

Centerra had its mining licence suspended in the summer of 2009 at Boroo while a government body examined the site for possible infractions.

While the licence has since been reinstated, more consequences of the review could yet come.

As part of the review, the government is considering banning mining activities in water basins.

Centerra’s vice-president of investor relations, John Pearson, says the government has yet to clearly define what would constitute a water basin.

And while Boroo’s status is considered secure, the Gatsuurt deposit, which is not near any body of water, does sit in a forested valley.

Pearson sys he is confident the economic development benefits that Gatsuurt would bring will ultimately outweigh concerns from some factions of the government.

Centerra isn’t allowing the issue to stop it from finishing off a road that will connect Gatsuurt to Boroo. The company has put US$15 million into the road, which, once complete, will allow it to truck oxide ore 35 km to Boroo where it will be processed on a soon-to-be-permitted heap-leach pad.

But Gatsuurt also contains sulphide ore — rock that is more expensive both to extract and to process.

The plan is to process sulphide ore at an expanded Boroo plant. But to do so, Centerra would have to spend US$58 million upgrading the Boroo mill so that it could handle Gatsuurt’s ore.

Centerra, however, is holding off on making such an investment until it gets clearer signals from the government.

“We want to have an investment agreement in place before we put up the capital expenditure,” Pearson says. “We don’t need (the investment agreement) but we would like to have it in place. It’s better to have something in writing.”

In the near term, Centerra expects the final operational permit for Boroo’s heap-leach pad to be in place by mid-April. It will then immediately begin processing Boroo’s oxide ore. It says it plans to produce 36,000 oz. gold from the ore.

Permits will also be needed for Gatsuurt, which Centerra hopes to have in place by mid-year, after which oxide ore from the deposit will be sent to Boroo. Centerra estimates that it will produce 52,000 oz. gold from Gatsuurt in 2010.

Cash costs for combined Boroo and Gatsuurt production are estimated to be between US$590- US$690 per oz.

For 2009, Boroo produced 150,550 oz. gold compared with the 525,042 oz. gold produced at Kumtor.

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

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