Centerra hits another roadblock at Kumtor

A swarm of protestors have blocked the only road leading to Centerra Gold’s (CG-T) Kumtor gold mine in Kyrgyzstan in a move to pressure the government to cancel the 2009 Kumtor agreement it signed with the miner.

On May 28, the Toronto-based miner said the illegal community protest has disrupted the movement of supplies and personnel to and from its flagship mine, located 350 km southeast from the capital city of Bishkek, and 60 km north of the Chinese border.

Centerra, which has previously suffered setbacks at the high-altitude mine, says it’s working with the government and local authorities to resolve the conflict.

While reassuring investors that Kumtor is running as usual, it warned that if the roadblock isn’t lifted soon it could undermine operations, including its ability to clear ice and waste from the pit, reducing mining rates. This would hurt the producer’s gold production and financials.

The latest interruption came just days before the government was expected to update the Kyrgyzstani Parliament about negotiations with the company concerning how it would revise or cancel the project’s 2009 agreement.

Parliament officials issued a decree in February, giving the government three months to conclude talks with Centerra. The decree came on the back of a 2012 state commission report that concluded Centerra should pay more to operate the Kumtor gold mine and alleged that the company had caused substantial environmental damage, which to date has amounted to fines of US$467 million.

According to the decree, if the government fails to reach a decision by June 1, it must terminate all the existing agreements associated with the Kumtor operation.

While the company’s vice-president John Pearson did not immediately respond to inquiries about the ongoing negotiations and roadblock, he told Reuters on May 28 that the government would likely request an extension to that timeline, as it appointed advisors on the matter a few weeks ago.

Commenting on the roadblock, BMO Capital Markets analyst Andrew Breichmanas says that “Kumtor has frequently been the target of roadblocks, with five incidents from 2005 to 2011, each lasting for about a week before operations returned to normal.”

During each interruption, he points out that Centerra shares did not “noticeably underperform the gold price or sector indexes.”

However, its shares are suffering from the weakening gold price and socio-political hurdles. Centerra, which has operated at Kumtor since 1997, has seen its shares decline 63% over the past 12 months. 

The latest roadblock at Kumtor occurred in December 2011, but it didn’t affect the year’s production or cost guidance. Instead, the company’s annual output in 2012 took a hit from a 10-day work stoppage at Kumtor, as well as ice and waste buildup at the pit.

For 2013, Centerra expects Kumtor to generate 550,000 to 600,000 oz. gold, at pre-tax costs of US$853 to US$931 per oz. Half of the production should occur in the fourth quarter.

For the three months ended March 2013, the mine churned out 89,618 oz. Operating costs at Kumtor were US$66.3 million and capital expenditures stood at US$102.2 million, Breichmanas says. He adds the company paid a 14% gross revenue-based tax of US$20.8 million over three months.

Kumtor is the largest gold mine in Central Asia that is being operated by a Western company, and in 2011 it accounted for 12% of the country’s gross domestic product.

Centerra was off 3% to close May 29 at $3.98, after gaining 2.5% the day before.