Centerra Gold announced 3Q2017 results

Andrey KozhokaruNovember 02, 2017

According to the results of 3Q2017, the Company's operating cash flow decreased by 11% y/y. The volume of gold sales at Kumtor decreased by 40% y/y. Centerra Gold adjusted the forecast for gold production in 2017.

During the reporting period, the Company increased revenue by 26% y/y to $276.2mn, with an increase in the cost of sales by 70% y/y to $164.2mn. Centerra Gold received a net loss of $0.8mn in 3Q2017 against net profit of $66.7mn in 3Q2016. Excluding one-off events, the Company's net profit for the period was $52.3mn (-22% y/y). In 3Q2017, the Company recognized the expense of $60mn related to the concluded agreement on a settlement of the dispute with the Kyrgyz government. An operating cash flow for the period was $119.5mn (-11% y/y). The total gold production for the quarter was 200 201 ounces (+ 21% y/y), of which 138 561 ounces (-17% y/y) was produced at Kumtor and 61 640 ounces at Mount Milligan mine. Gold sales amounted to 174 099 ounces (+ 6% y/y). 6,204 tons of copper were produced, while sales equaled to 8,457 tons. The all-in sustaining cost of gold, excluding taxes, was $722 (+22% y/y). In 3Q2017, the Company repaid $111.9mn of debt. The amount of cash and cash equivalents on the Company's account as of September 30 was $352.1mn against $401.4mn as of June 30, 2017.

The reason for the reduction in production at Kumtor was the processing of ore with a lower grade and low recovery level. The decrease in gold sales at Kumtor to 99 514 ounces (-40% y/y) was due to a decrease in the supply of gold to Kyrgyzaltyn. Under the established agreement, all the produced gold in the territory of Kyrgyzstan, the Company sells to Kyrgyzaltyn, which in turn sells the processed gold to Otkritie bank. The Central Bank of Russia has taken the bank under temporary management and provided financial assistance, because of bank’s instability. Centerra Gold decided to impose restrictions on the supply of gold to Kyrgyzaltyn until another purchasing bank is selected, which is expected in 4Q2017. As of September 30, the accumulated gold produced at Kumtor mine amounted to 48 678 ounces. The Company reported an increase in the forecast for gold production at Kumtor in 2017 from 525 000-555 000 ounces to 540 000- 560 000 ounces, expecting higher grads and level of recoveries. At the same time, the Company lowered its forecast for gold production in 2017 at the Mount Milligan mine from 260 000-290 000 ounces to 235 000-255 000 ounces. In 3Q2017, the decline in gold production at Mount Milligan was caused by a decrease in mill throughput due to technical issues, which provided the decrease in the annual production forecast.

Centerra Gold presented the results of a feasibility study of the Gatsuurt project in Mongolia. The after-tax payback period of the project is 7 years, with NPV of $39.4mn and IRR of 9.3%. The company said that it will use these results during the negotiations with the Mongolian authorities and will take a decision on the project only if it is economically beneficial.

The management of the Company expressed cautious optimism about obtaining a key pastureland permit from the Turkey government, after which the Oksut project could be launched.

Our opinion:

We note as a positive factor the accelerated reduction of the debt q/q. Currently, we consider the reduction in production at Mount Milligan as a short-term operational issue, which requires increased attention. We consider as a possible scenario that the Company may reject the Gatsuurt project in its current form, without significant concessions from the Mongolian authorities. We expect an increase in the sale of gold in 4Q2017 derived from the sale of accumulated stocks of gold produced at Kumtor. Regarding the Oksut project, we estimate that there is average risk level of risk associated with obtaining a key pastureland permit from Turkey authorities due to the possible presence of a political factor in the decision process. Based on the current fundamentals, we do not see any reason to change our long-term forecasts for the operational and financial performance of Centerra Gold. We maintain our Buy recommendation.