Centerra chops Kumtor’s output for 2012

Centerra Gold (CG-T) recently saw its shares plunge 15% after cutting its production forecast for the Kumtor gold mine owing to increased ice movement in the southeast section of the pit, which will restrict access to high-grade ore.

Located in the Kyrgyz Republic, the company’s flagship mine is slated to produce between 390,000 oz. and 410,000 oz. gold — down from the previous estimate of 575,000 oz. to 625,000 oz.

Centerra shares plummeted following the March 27 news to a 52-week low of $12.65, before losing $2.43 to close at $13.70.

The company explains that Kumtor’s output is contingent on maintaining waste mining rates and ice in the pit’s southeast section so that miners can access the higher-grade ore in the SB zone. The coveted material can only be recovered through cutback 14A, which the company plans to tap into later this year.

But icy accumulation in the southeast section and a 10-day work stoppage in early February has delayed stripping material from the cutback as the company clears up the area.

As a result, Centerra anticipates pushing the cutback to late 2013. This means production expected this year from the SB zone will be deferred until 2013 or 2015.

To mitigate the effects of the ice movement and the resulting output delay, Centerra plans to step up mining in the pit’s southwest portion and access part of the new reserves this September to provide better feed for the Kumtor mill.

Kumtor’s reserves were updated in early February, and stand at 59.7 million tonnes grading 3.3 grams gold for 6.3 million contained oz. gold.

While the company says it is assessing the build up’s impact on its life-of-mine plan, it cautions that its collective bargaining agreement with miners expires this year, and that any work stoppages during the year could affect Kumtor’s production goals. Miners went on strike in early February following a dispute over social fund deductions. Centerra estimates the 2012 settlement cost at US$4 million.

However, Scotiabank analyst Trevor Turnbull told The Northern Miner in an email that he doesn’t expect significant hurdles to the new guidance.

“Centerra is a very good operator and I do not anticipate it will have any problem with the snow, ice and waste removal. The problems it did have were the result of an unfortunate convergence of the work stoppage in the pit while the snow and ice were just beginning to thaw. Once the company is through the snow and ice later this year, even a work stoppage would not have the same consequences it did this spring.”

He opines that Centerra was oversold on the revisions. He has upgraded the stock to a “1-sector outperform” and maintains a $23 one-year target price.

Turnbull had lowered his target to $23 from $26 per share following the production revision in March.

Similarly, BMO Capital Markets analyst Andrew Breichmanas revised his target price to $22.50 from $25 on the news.

“The news highlights the challenging operating environment at Kumtor and the potential for underground development to improve consistency,” Breichmanas writes in a note to clients.

The company expects initial underground production from Kumtor in 2013.

Centerra also operates the Boroo gold mine in Mongolia, and expects it to churn out 60,000 oz. for the year from stockpiles, and from mining pit 6.