Centerra reveals details of Kumtor state review

VANCOUVER — Centerra Gold (CG-T) continues to release details regarding a parliamentary review of its Kumtor gold operation in Kyrgyzstan. During a second quarter conference call Centerra’s management outlined the structure of the Kyrgyz commission, and indicated the final review is expected to be presented by the beginning of November.

Centerra first learned of the Kyrgyz government’s intention to review the company’s Kumtor mine — which has been in operation for 15 years — on June 18. A parliamentary document accused the Toronto-based gold producer of environmental shortfalls and demanded the Kyrgyz government attempt to increase its stake beyond the current 33% level.

According to Centerra president and CEO Ian Atkinson a parliamentary committee will oversee three separate groups, each responsible for reviewing an aspect of the company’s activities at Kumtor.

One branch will be looking at the environmental and operational aspects of the mine and arrived on site roughly seven days ago to begin the process. A second Kyrgyz group will be responsible for reviewing social and financial impacts at Kumtor, including taxation protocols, procurement arrangements, and associated payments. The final branch of the review committee consists of a legal team tasked with studying existing agreements and documents under which Centerra operates in the country,

“We’re working with the commission and the government to address all the concerns. Kumtor operates within all Kyrgyz laws and meets or exceeds all domestic and international environmental, safety and health standards,” Atkinson commented during an August 2 conference call. “We have demonstrated this over the years through systematic compliance reports, which have been reviewed by Kyrgyz and international officials. Also our updated agreements were approved by all relevant government bodies, including the parliament and constitutional court.”

Centerra had difficult negotiations with the Kyrgyz government in June 2008, when parliament refused to ratify the company’s working agreements. It took Centerra roughly a year to resolve the issues — the agreement was eventually ratified in May 2009.  

According to Atkinson, Centerra expects the parliamentary review to be completed by October, with a presentation of the findings taking place on November 1. Centerra remains in the dark as to what type of actions the Kyrgyz government might take following the report, but indicated its existing agreements remain subject to international arbitration.

“Unfortunately for all shareholders, Centerra’s share price has been negatively impacted by the recent developments in the Kyrgyz Republic,” Atkinson commented. “We continue to believe that the Kyrgyz Parliamentary Commission’s report regarding the Kumtor gold project and its findings are without merit.”

Full nationalization at Kumtor appears unlikely. The Kyrgyz parliament voted against a draft decree on June 27 that proposed the creation of a state-owned entity to assume full control of Centerra’s operations. In place of the nationalization decree, parliament adopted Resolution 2117-V, which calls for a review to “assess the environmental, industrial and social damage caused by the Kumtor project and to initiate the renegotiation of the current project agreements, in order to protect economic and environmental interests.”

Despite lingering uncertainty Centerra is proceeding with a feasibility study on a potential expansion, as well as stripping and de-icing activities necessary to access higher-grade SB Zone ore in Kumtor’s existing pit.

According to vice president and COO Jeffrey Parr the company racked up roughly US$14 million in “abnormal mining costs” during the second quarter, that included two elements: Firstly, a US$10-million shortfall related to stripping activities that affected ore production; and secondly, associated de-icing and waste removal from high movement mine areas that cost the company US$4 million.

The extra costs bumped Centerra’s second quarter loss to US$54.6 million or 23¢ per share, compared to a profit of US$71 million or 30¢ a share in second quarter 2011 — revenues fell 63% to US$90 million on the back of lower production and falling realized gold prices.

According to a research update by Bank of Montreal Capital Markets analyst Andrew Breichmanas, Centerra should still be able to hit its 2012 guidance of roughly 460,000 oz. of gold assuming the company realizes significant production improvements as it hits high-grade ore at its SB Zone during the fourth quarter,

“[Though] the return to more normal production rates is likely to be overshadowed by the work of a State Commission tasked with assessing the environmental, social and economic impact of the mine, and initiating the renegotiation of current project agreements,” he writes in an August 2 research note.

Breichmanas maintains an “outperform” rating on the company with a $12.50 target price.

Centerra has plummeted 43% or $5.63 since the Kyrgyz government announcement in late June, and also saw the resignation of Niyazbek Aldashev from its board. Aldashev served as co-Chairman of the company’s social responsibility board and is a managing partner at an international law firm headquartered in Bishkek, Kyrgyzstan.

Centerra’s fortunes continued to flounder following the announcement of its second quarter results. Shares dropped 4% or 26¢, as the company closed in on 52-week lows, finishing up the August 2 trading session at $6.77.