Centerra continues to face challenges at Kumtor

VANCOUVER — The past year has been marked by significant operational and jurisdictional challenges for Toronto-based producer Centerra Gold (CG-T) at its flagship Kumtor gold mine 350 km southeast of Bishkek in the Kyrgyz Republic.

Centerra continues to strive for consistent production at Kumtor after complications relating to ice and waste removal at its SB Zone triggered a significant fall in gold output over the second and third quarter. The company still expects roughly 50% of its 2013 production — pegged at between 605,000 oz. and 660,000 oz. of gold — to occur during the fourth quarter. Management did, however, outline expectations that this will be the final year of back-end loaded production due to growing stockpiles that should allow for more consistent operations.

As a result of delayed access to the SB Zone and a mine plan revision that involved a switch from underground to open-pit development, Centerra saw its consolidated gold production fall from 642,380 oz. in 2011 to 387,076 oz. in 2012. Cash costs were also on the rise, jumping from US$502 per oz. to US$663 per oz.

The company did enjoy a year-on-year production jump in the fourth quarter, however, as it began to smooth out its operations at Kumtor. Gold production during the fourth quarter was up roughly 68,000 oz. year-on-year to 219,316 oz., with production at Kumtor jumping 37% to 189,438 oz. of gold as higher throughput was achieved in the mine and mill.

Centerra posted adjusted earnings totalling US$112.7 million, or 48¢ per share, in 2012, excluding a one-time charge of US$180.7 million stemming from the underground shut down. Though that fell well below net earnings of US$371 million, or $1.57 per share, the company enjoyed in 2011, it still beat a consensus analyst estimate pegged at 45¢ per share.

“[It] was a challenging year, beginning with the ice and waste movement at Kumtor, the revised mining plan, political challenges, lower than expected mill throughput and recovery, as well as lower than expected mill head grades encountered in the fourth quarter at Kumtor as we were mining the newly discovered portion of the orebody,” commented president and CEO Ian Atkinson. “We continue to focus on our exploration and business development efforts as we look for additional operating platforms in an effort to increase our future gold production, [and] diversify our regions of operation.”

And Centerra’s socio-political challenges look to continue into 2013, as the company grapples with an ongoing investigation by the Kyrgyz parliament into its operations at Kumtor. The government is pushing to revise Centerra’s mining agreements, as well as seeking damage payments over past environmental issues.

In late January Centerra was forced to issue a statement after reports from local Kyrgyz media outlets indicated that Minister of the Economy T.A. Sariev had made public statements endorsing recommendations to renegotiate Kumtor’s operating terms in a bid to institute a new tax regime and implement higher environmental charges on the project. Centerra reiterated that its agreements were approved under applicable Kyrgyz law, which provides for dispute resolution by international arbitration.

On Feb. 21 Centerra issued another statement following a decree by the Kyrgyz Parliament that set a three month deadline on negotiations. Under terms of the decree, if a deal cannot be reached by June then the government has been instructed to terminate all existing agreements relating to Kumtor’s operations. A state commission wrapped up an investigation at the project in late 2012, and issued a report in December outlining a series of violations by Centerra that includes environmental damages and undervaluing of assets.

“[We] believe that the [conclusions and recommendations] are exaggerated or without merit and have responded in detail to the [state commission],” Atkinson outlined. “We have always benefited from a close and constructive dialogue with the Kyrgyz authorities over the many years we have operated there and remain committed to continuing to work with them to resolve these issues. However, no assurances can be given that the claims and recommendations can be resolved without a material negative impact on [Centerra].”

On top of ongoing negotiations, Centerra has been the target of claims by the State Agency for Environmental Protection and Forestry. Along with news of the decree, the company also indicated it received an additional claim of US$315 million in relation to alleged environmental damages resulting from Kumtor’s operations. The action follows the filing of five similar claims in mid-December that carry an aggregate fine of US$152 million.

Centerra’s shares have fallen roughly 62% or $11.07 over the past thirteen months. The company was down 9.3% or 71¢ following news of the Kyrgyz decree on Feb. 22 before closing at $6.90, and maintains 236 million shares outstanding for a $1.62 billion press-time market capitalization. Centerra reported cash and equivalents totalling US$382 million at the end of the third quarter.