Centerra closer to restructuring Kumtor’s ownership

Centerra Gold (TSX: CG; US-OTC: CAGDF) says Kyrgyzstan’s parliament has passed a resolution that appears to support the new ownership structure for the country’s largest gold mine, despite several “materially inconsistent” recommendations.

Kumtor, located 350 km southeast of the capital Bishkek and 60 km north of the Chinese border, is the largest gold mine operated in Central Asia by a Canadian miner. The asset has generated more than 8.6 million oz. gold between 1997 and 2012.

However, lately it has been the centre of controversy, with opponents demanding the government nationalize the mine or at least increase its ownership. The company is also allegedly facing over US$467 million in environmental fines.

In an attempt to alleviate the ownership concerns, Centerra entered a non-binding heads of agreement (HOA) with the Kyrgyz government late last year. Under that agreement, state-owned entity Kyrgyzaltyn could swap its 32.7% equity interest in the company for a 50% stake in a proposed joint venture that will operate the Kumtor gold mine. Centerra, the operator, will own the remaining half of the joint venture.

After 12 years, Kyrgyzaltyn could buy another 17% of the joint venture at market value to increase its stake to 67% in 2026.  

Government officials submitted the agreement to the Kyrgyz parliament for review last December. On Feb. 6, 2014, Centerra said that while the parliament voted in favour of the proposed joint venture, it had introduced several provisions that were “materially inconsistent with the terms of the HOA.”  

Providing a few examples, John Pearson, the company’s vice-president of investor relations, says the parliament recommends mining at Kumtor should be restricted to the Central Pit, ignoring the satellite deposits. It also advises that the government should select a managing company to run Kumtor after Centerra directs the joint venture for at least three years.

“Among other things, the resolution calls for further audits of the Kumtor operation and for the government and the general persecutor’s office to pursue claims for environmental and economic damages, which the company disputes,” Centerra adds. The company previously requested that the Kyrgyz government drop these charges.

Centerra says it is continuing discussions and that any agreements for restructuring Kumtor will require several approvals, including from Kyrgyzstan’s government and parliament, as well as from the company’s special committee and board.

While Pearson could not provide a time frame on when the negotiations should conclude, he did say the resolution was a step in the right direction. 

BMO analyst Andrew Breichmanas agrees. He says despite the agreement potentially lowering his valuation on the company, it “could restore some medium-term stability to the operating environment.”

“Kumtor remains a world-class asset capable of generating free cash flow in a weaker gold-price environment, in BMO Research’s view. The new agreement is expected to better align stakeholder interests to realize dividends while maintaining Centerra’s rights under the 2009 investment agreement,” Breichmanas writes. He has an $8.50 price target and an “outperform–speculative” rating on the stock.

Salman Partners analyst David West has a “buy” recommendation and an $8 target.

Centerra updated its year-end reserves and resources, indicating that its gold reserves fell nearly 9% to 104.7 million tonnes grading 3 grams gold per tonne for 10.2 million oz. “The decline largely reflects mining depletions at the Kumtor mine, partially offset by positive stockpile grade reconciliation at Boroo and an increase in reserves at Gatsuurt,” Breichmanas says. The Boroo and Gatsuurt gold mines are in Mongolia.

Meanwhile, Centerra’s measured and indicated resources increased by 7% to 5.5 million oz. from 97.3 million tonnes of 1.8 grams gold, thanks to the inferred resource conversion at its Oksut project in Turkey. Centerra aims to complete a preliminary economic assessment at Oksut by April.

Centerra produced a total of 690,720 oz. gold last year, of which 600,402 oz. gold came from the Kumtor mine, and the rest from  Boroo.

Kumtor should deliver 550,000 to 600,000 oz. gold this year, similar to 2013, while Boroo should add 45,000 oz. gold. This brings Centerra’s 2014 production guidance to 595,000 to 645,000 oz. gold, at all-in costs of US$989 to US$1,074 per oz.