Centerra faces challenges at Kumtor

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

Centerra is striving for consistent production at Kumtor after complications relating to ice and waste removal at its SB zone triggered a fall in gold output over the second and third quarter. The company still expects 50% of its 2013 production — pegged at between 605,000 and 660,000 oz. gold — during the fourth quarter. But management said this would be the final year of back-end loaded production, due to growing stockpiles that would 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.

But the company enjoyed a year-on-year production jump in the fourth quarter, as it smoothed out its operations at Kumtor. Gold production during the fourth quarter was up 68,000 oz. year-on-year to 219,316 oz., with production at Kumtor jumping 37% to 189,438 oz. gold, with higher throughput 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 shutdown. This fell below net earnings of US$371 million — or the $1.57 per share the company enjoyed in 2011 — but it 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,” president and CEO Ian Atkinson says. “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.”

Centerra’s socio-political challenges could 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, and is seeking damage payments over past environmental issues.

In January Centerra issued 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, 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 violations by Centerra that include 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 says. “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].”

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

Centerra’s shares have fallen 62%, or $11.07, over the past 13 months. The company was down 9.3%, or 71¢, following news of the Kyrgyz decree on Feb. 22, before closing at $6.90. It 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.