We raise our 12-month target price to CDN$16.0/share, but maintain a “Sell” recommendation on the stock. The updated target price reflects the increase in the company’s 2011 production guidance, the higher total cash cost of production expected for the year, lower than previously planned 2011 capex and our revised gold price outlook.
3Q2011 EPS at $0.35
The company’s revenue increased by 132% QoQ to $ 278.4mln due to a 68% increase in gold sales volume and a 38% increase in realized gold price. The increase in gold production was due to higher throughput, lower waste movement and processing of higher grade material and better recoveries at Kumtor mine. In 9M2011, Centerra produced 490.8koz of gold, with more than 90% of this volume attributable to Kumtor. The total cash cost of production declined by 30% QoQ to $556/oz. The company’s net income for the quarter amounted to $83.8mln, while EPS equaled $0.35.
Revised production, cost and capex estimates
Centerra revised its 2011 production and cost guidance. The company narrowed the range of expected production volume to 640-660koz, up from an earlier guidance of 600-650koz. Additionally, Centerra marginally increased the cost guidance to $480-500/oz from the previous estimate of $460-495/oz due to rising cost pressures at Kumtor mine. The company expects production at Kumtor mine to be in the range of 580-600koz at an average total cash cost at $460-480/oz, and Boroo production to equal 60koz at an average total cash cost of $750/oz. Guidance on capital spending for 2011 was cut by $10mln to $193mln, of which $157mln is allocated to growth spending and $36mln to sustaining capex. We have updated our model accordingly, and now estimate 2011 production to amount to 625koz and the total cash cost to equal $492 per ounces of gold produced. (see Figure 1).
|Figure 1. Summary of key metrics|
|3Q2011||3Q2010||QoQ %||9M2011||9M2010||YoY %||2011 HF estimate||% of HF estimate|
|Cost of sales, $mn||111||94||17%||210||253||(17%)||273||77%|
|Net earnings, $mn||84||16,9||396%||292||171,5||70%||430||68%|
|Earnings per share (EPS), $/share||0.35||0.07||400%||1.23||0.73||68%||1.82||67%|
|Average gold spot price, $/oz||1702||1227||39%||1535||1178||30%||1570||-|
|Average realized gold price, $/oz||1705||1237||38%||1534||1163||32%||1570||-|
|Gold produced, koz||155||96||61%||491||429||14%||625||79%|
|Total cash cost, $/oz||556||798||(30%)||474||521||(9%)||492||-|
|Total production cost, $/oz||857||964||(11%)||649||648||0%||-||-|
|Sources: Company data, HF estimates|
Gold price forecast
In the next five years, the uncertainty regarding the prospects of the global economy and a rising inflationary pressure across the world will keep the price of gold above $1400/oz, we believe. Accordingly, our gold price forecast has been adjusted to reflect this view. (See Figure 2.)
|Figure 2. Revision of gold price forecasts|
|Source: HF estimates|
Shares still overpriced
Despite our positive outlook on the price of gold in the next 3-5 years, we estimate the fair value of Centerra Gold at CDN$16 per share. The main constraints to a higher valuation are limited production growth opportunities and continued uncertainty over its assets in Mongolia.
The company’s growth profile may improve once production from underground zones of Kumtor deposit starts in 2013. Resolution of the regulatory stalemate in Mongolia could add 150-200koz of gold per annum from Gatsuurt deposit to the company’s total output, serving as another strong share price catalyst.