Centerra’s Atkinson talks Kumtor, M&A opportunities

VANCOUVER — Centerra Gold’s (TSX: CG; US-OTC: CAGDF) wholly owned Kumtor gold mine in the Kyrgyz Republic — 350 km southwest of the capital of Bishkek — is an ample cash generator, and president and CEO Ian Atkinson says the company is now able to explore more acquisition opportunities thanks to its strong balance sheet.

In fact, the only potential overhang for Centerra is the ongoing restructuring of its ownership deal with the Kyrgyz government, though Atkinson adds that the parties have outlined a “road map forward” that could lead to a resolution.

“The [agreement] would bring immediate benefits to the Kyrgyz treasury through a direct interest in Centerra, so they start to share in the profits from Kumtor on an annual basis. The government has stated it is in their best interest to move the process forward,” Atkinson says during an interview.

Kumtor is Centerra’s cornerstone, with proven and probable reserves of 85.2 million tonnes grading 3.1 grams gold per tonne for 8.5 million contained oz.

Company-wide during the second quarter the company cranked out 92,124 oz. gold at cash costs of US$608 per oz. Kumtor accounted for 77,860 oz. of that total, and with the company hitting the high-grade SB zone in mid-September, it estimates that half of its annual guidance will occur during the fourth quarter. Centerra expects to produce between 550,000 and 600,000 oz. gold this year.

“We’re definitely still on track in regards to our 2014 plan,” Atkinson says. “Like so many companies we’ve been maintaining a focus on lowering our operating costs, and we’ve had lower sustaining capital expenditures as well. Our two biggest on-site costs are labour and diesel. In terms of our mining fleet we completed a combination of expansion and replacement, which really improved operating efficiency. We are seeing the benefits of lower prices on tires and fuel as well, so our unit costs have been down.”

Cash provided by operations increased to US$72 million compared to US$41 million in the second quarter of 2013, though Centerra recorded a US$29.6-million net loss in the first half of 2014, compared to net earnings of US$53 million in the comparative period of 2013. The decrease in earnings is blamed on lower realized gold prices, higher share-based compensation and an inventory impairment charge at Kumtor.

Centerra has a good capital position, however, as the company finished the second quarter with US$313 million in cash, US$179 million in short-term investments and US$74 million in a revolving-credit facility.

“We have a strong balance sheet, and one of the uses we’re exploring is to use that to grow the company,” Atkinson says. “We are looking for an additional operating platform through merger-and-acquisition activities, and that could take the form of a currently operational mine or an advanced-development project. If we can find the right asset that adds value to our portfolio, we’d certainly look at moving forward on that front. We have been Asia-focused since we went public ten years ago, but the past year and a half we’ve started to expand the regions where we’re looking for opportunities.”

In terms of organic growth opportunities Centerra is nearing the permitting stages on a pair of advanced-staged gold assets: its Oksut project in Turkey and Gatsuurt property in Mongolia. The company tabled a preliminary economic assessment (PEA) on Oksut in mid-February that modelled an open-pit, heap-leach mine with a 19% internal rate of return (IRR) that would produce 893,000 oz. gold over an 11-year life.

Atkinson comments that feasibility work is proceeding well at Oksut, and that the company has filed paperwork with relevant government agencies in Turkey to set dates for the public-consultation meetings.

Meanwhile, Centerra is asking the Mongolian government to advantageously label Gatsuurt a “strategic project.” The country has undergone some shifts in mining law recently following a moratorium on exploration licences and permitting delays, but Atkinson says the company is “encouraged” by its talks with the government. Gatsuurt lies 35 km from Centerra’s Boroo mine, which produced 14,300 oz. during the second quarter.

Atkinson says that the government “needs to get Gatsuurt on the agenda for the parliamentary session that starts in late September. If parliament accepts the recommendation to label the project ‘strategic,’ it will allow us to move everything forward,” Atkinson explains. “Over the past twelve months there has been recognition in Mongolia of the need to address the drop in foreign investment, especially in the resource sector. The government and parliament are taking steps to do that, and we’re optimistic about our opportunities in the country.”

Centerra shares have a 52-week  range of $2.82 to $7.20, and fell 8%, or 51¢, after its second-quarter results, en route to a $5.81 close at press time. There are 237 million shares outstanding for a $1.4-billion market cap, and the company declared a quarterly dividend of 4¢ per share.