Centerra weathers a rough ride in 2006

As Centerra Gold‘s (CG-T) fourth quarter results laid bare, 2006 was not a banner year.

But the company that built its name on mining gold in regions where others fear to tread namely the Kyrgyz Republic and Mongolia — is taking its lumps in stride and looking towards a strong coming year.

“While long term things look good for Kumtor, this year was poor,” said David Petroff, Centerra’s chief financial officer, of the company’s flagship property.

Kumtor, in the Kyrgyz Republic, suffered from a pit wall collapse in July which forced it to alter its mine plan. That in turn resulted in mining lower grade material and suffering higher cash costs.

Lower production and higher costs meant that Centerra saw its earnings fall to US$1.9 million or 1 per share in the fourth quarter, compared to US$6.4 million or 3 per share for the same period in 2005.

Total cash costs including Kumtor and Centerra’s other operating mine, Boroo in Mongolia — rose to US$473 per oz. compared with just US$300 and oz. for the same period in 2005.

Combined the two mines produce 142,000 oz. for the quarter, compared to 167,000 oz. for the same period in 2005. Kumtor’s production for the quarter was 62,000 oz. compared with 99,000 oz. for the same quarter in 2005.

But Leonard Homeniuk, president and chief executive of Centerra, says high grades will return to Kumtor once the higher grade SB zone at the southern end of the pit is reached. Exploration in 2006 identified a 1.8 million oz. inferred resource in the zone. The company says it will be taking ore from SB this quarter and will continue to all year, with higher grade ore coming out in the second half of the year.

Kumtor was also hit with unexpected costs in the form of what is being called a “high altitude premium”. Centerra settled with striking workers over the premium by agreeing to pay US$6 million for 2006, and roughly the same amount for the next two years.

But the company will not make those payments without a fight. It argues that its investment agreement with the previous government protects it from the payment.

“We look forward to talking to the new government,” Homeniuk said of the recently installed adminstration. “We have some issues on the high altitude premium.”

Looking forward

Capital expenditure for 2007 will be roughly US$110 million, with US$25 million going towards maintenance capital, US$45 million going into Mongolia and US$40 million going to Kumtor.

Much of the money spent at Kumtor will be for exploration as the project will eat through US$15 million of the entire US$25 million exploration budget.

Centerra estimates production will rise to between 700,000 and 720,000 oz for 2007, a 20% increase, with cash costs coming in between US$375 and US$385 an oz.

Mongolia

Political intrigue is not limited to the borders of the Kyrgyz Republic. Mongolia has grabbed its share of attention for its parliament’s dealing with what had been a burgeoning mining industry.

While its Boroo open-pit mine has been protected by a favourable agreement with the government signed before controversy erupted around the parceling of the country’s mineral reserves, the shaky political climate is weighing on the development of Centerra’s most advanced exploration project, Gatsuurt.

The roughly 1 million oz. in reserves sitting at Gatsuurt can’t be mined and delivered to Boroo for processing until Centerra secures an investment agreement with the Mongolian government.

Ivanhoe’s much publicized lack of a similar investment agreement for its massive Oyu Tolgoi (OT) project had one analyst wondering if the government would wait to deal with Centerra after it dealt with Ivanhoe first.

“They may, but I don’t think so,” said Homeniuk, “OT is huge for them while (Gatsuurt) is only 1 million oz. So they wouldn’t necessarily have to conclude OT before us.”

Adding to the wait time thus far has been the firing of the Mongolian minister of industry under whose domain the agreement fell.

Homeniuk says Centerra will have to wait at least a couple of months for the government to re-order itself and be ready for a new round of negotiations.

“We are not in negotiations right now. We’ve negotiated what we thought was an acceptable deal but they weren’t able to consummate it on their side,” he said.

Still, Centerra is budgeting for 2007 as if Gatsuurt will go ahead. The project is estimated to cost US$75 million to construct, and Centerra has budgeted for US$25 million of the total for 2007.

Good news from Boroo

The Boroo mine has delivered more certainty to Centerra. The company said operations there “exceeded expectations” with the production of 80,000 oz in the fourth quarter compared to 68,000 oz for the same period in 2005. Cash costs at the mine rose only marginally to US$225 an oz compared to US$223 an oz. for the fourth quarter of 2005.

On the exploration side, 343,000 oz were added at the project which replaces the reserves mined in 2006.

Additional positive news at Boroo is that on top of its already operating mill, a heap leach pad has been approved for lower grade ore, and should begin producing gold by the fourth quarter of this year.

Priorities going forward

As the conference call wound down, Homeniuk laid out the company’s priorities for the coming year.

At the top of the pile was getting Gatsuurt into production. Next on the list of importance is moving underground at Kumtor to mine the SB zone. Thirdly, Homeniuk said, expanding reserves and resources was important and last on the top four list was looking for new growth opportunities through acquisitions.

In Toronto on Feb.7, Centerra shares were off nearly 3% or 36 to $13.17 on roughly 460,000 shares traded.