Centerra Gold presented strong results for 2q and raised gold production guidance for 2017.

Andrey KozhokaruAugust 02, 2017

In 2q2017 the company produced 195 719 ounces of gold, out of which 138 623 ounces at Kumtor (+42% yoy). At Mount Milligan mine the company produced 57 096 ounces of gold and 15.1mln pounds of copper.

According to 2q2017 results, Centerra Gold produced 195 719 ounces of gold (+100% yoy) and 15.1mln pounds of copper. As was the case in 1q2017, main source of production growth was new asset of the company, Mount Milligan mine. Out of 195 719 ounces of gold, 138 623 ounces mined at Kumtor and 57 096 ounces at Mount Milligan. In 2q2017 average realized price for the gold was $1 165 per ounce and average spot price of copper was $2.57 per pound. In 2q2107 revenue of the company reached $279.2mln (+74% yoy), earnings from operating activities reached $24.2mln versus $1.3mln in 2q2016, net income equaled $23.4mln versus $2.9mln in 2q2016. Operating cash flow amounted to $142.8mln. In 2q2017, Centerra Gold recognized $41.3mln impairment charge for its Mongolian assets.

Considering latest production results, the company raised its guidance for 2017 from 715 000-795 000 ounces to 785 000-845 000 ounces of gold. Main reason of increase in guidance was revision of Kumtor operating forecast from 455 000-505 000 ounces of gold to 525 000-555 000 ounces of gold, because of higher-grade ore.

At 30 June 2017, Centerra Gold had $401mln on its cash balance, out of which $300mln resided on accounts of its subsidiary Kumtor Gold. As an outcome of litigations, Kyrgyz authorities put restrictions on financial transactions between Centerra Gold and its subsidiary. Such restrictions allow use of cash only for Kumtor financing. 12 January 2017 the company filed a request to court of arbitration for voiding restrictions. 17 July 2017 court of arbitration rendered interim decision that Kyrgyz side should not take any judicial or procedural actions without advance, proper notification of arbitrator and Centerra Gold, so the company can appeal particular claims. Nevertheless, arbitrator did not invalidate financial restrictions on Kumtor Gold, regarding such restrictions as without substantial harm. 23 February 2017 Centerra Gold filed full statement of claim against Kyrgyzstan authorities to court of arbitration; response from Kyrgyz side should be available in September 2017.

Our opinion:

Production results for 2q2017 were in line with our expectations. Considering seasonal factor, significant amount of gold production will appear in 4q2017. We expect gold production to reach 800 000 ounces in 2017, what corresponds to new production guidance for the year of 785 000-845 000 ounces. In case of stable prices on metals, the company can demonstrate good financial results in 2017. Main source of risk for the business remains continuing disputes with Kyrgyz authorities. Centerra Gold stopped dividends payments, because of financial restrictions on its subsidiary. There are no guarantees that arbitrator’s decision will be in favor of the company and that Kyrgyz side will implement particular decision. The company’s latest moves for business diversification including acquisition of Mount Milligan mine, development of new projects in Turkey, Mongolia, and Canada, have considerable positive effects. However, Kumtor remains main revenue generating asset of the company. Centerra Gold does not have financial reserves, provisions for the negative outcomes of litigations. We think that current disputes could continue for a long time, while Kumtor’s operations proceed as planned. Nonetheless, owing to financial restrictions put on Centerra Gold’s subsidiary, some decisions should follow, because neither Centerra Gold nor Kyrgyz Government would get dividend payments without repeal of restrictions on transactions. Due to the lack of certainty regarding future conditions of Centerra Gold operations in Kyrgyzstan, we keep our Hold recommendation.