Gold rally leads to another solid quarter

Mariyam Zhumadil, CFAAugust 02, 2011

Last week, Centerra Gold once again delivered solid, but expected, quarterly financial results as gold hit $1600/ounce during the quarter. Centerra’s quarterly revenue grew by 60.2% QoQ to $244mln reflecting a 26% increase in the gold sales volume and a 27% increase in the average realized gold price.

Gold production grew by 27.5% QoQ to 155koz largely due to a 54% increase in gold production at Kumtor.  The jump in output of the company's flagship asset occurred due to higher recoveries and grades of processed ore.  Production at Boroo fell by 49% QoQ due to processing of stockpiled low-grade ore with lower recoveries after mining operations ceased at the end of 2010. The heap leach facility at Boroo remains idle due to the absence of the license.

The total cash cost declined by 16.7% QoQ to $513 per ounce mainly due to the higher production at Kumtor, which was partially offset by increased operating costs at Kumtor and a slowdown in operations at Boroo. Centerra's earnings per share improved by 131% QoQ to $0.30 per share.

Capital expenditures in April-June 2011 totaled $48.6mln. Of this amount, $40.2mln is growth spending allocated to pre-stripping activities at Kumtor, equipment procurement and underground development works.

Table 1. Summary of key financials      
  2Q2011 2Q2010 QoQ growth 
Revenue, $mn 243.8 152.2 60.2%
Cost of sales, $mn 105.9 79.8 32.7%
Net earnings, $mn 71.1 30.7 131%
Earnings per share (EPS), $/share 0.30 0.13 131%
Capex, $mn 48.6 54.7 (11.2%)
Average gold spot price, $/oz 1506 1197 25.8%
Average realized gold price, $/oz 1527 1200 27.3%
Gold produced, koz 155 122 27.5%
Total cash cost, $/oz 513 616 (16.7%)
Total production cost, $/oz 625 757 (17.4%)
Source: Company data      

Our view: The reported 2Q2011 results contain no surprises and indicate continuation of trends of the previous quarter. The impressive revenue growth is being brought by the record-high gold prices rather than output increases at the existing mines.

A boost in production is much more likely to come as a result of the company’s exploration activities. For example, during the quarter the company discovered a "significant gold mineralization" at its Altan Tsagaan Ovoo property in the Eastern Mongolia and plans to publish initial resource estimate for the property by the end of 2011.  Moreover, Centerra has entered into three exploration JVs, which we believe will enhance the company’s opportunities for organic growth in the future.   

We updated our model to reflect the current level of the gold price by marginally increasing our 2011, 2012 and 2013 gold price estimates to $1550, $1500 and $1400, respectively. Even at these higher level the company’s stock remains overpriced, according to our model. We maintain our 12-month target price at CDN$15.3 per share and reiterate a “Sell” recommendation on the stock.   

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