Capex overshadows production and price effects

Mariyam Zhumadil, CFAFebruary 09, 2012

Centerra Gold’s 2011 production results are within its earlier guidance range, while the 2012 capex budget is significantly larger than we expected. Our reduced 12-month target price of 14.3CAD/share reflects this surprise increase in 2012 capex and our revised gold price forecast.

2011 production falls by 5%

Centerra Gold’s 2011 production amounted to 642,380oz of gold (-5% YoY), which is at the top end of the company's earlier guidance range of 600,000-650,000oz of gold. Last year, Mongolian operations accounted for less that 8% (59koz of gold) of the company’s total output because the company’s heap leach operations at Boroo and Gatsuurt mines remained suspended. Centerra is uncertain as to when it may receive regulatory approvals needed to continue its operations in Mongolia. In 4Q2011, the company produced 151,562oz of gold, of which 138,696oz were mined at Kumtor mine in Kyrgyzstan. (See Fig. 1)

Figure 1. Summary of production results       
  4Q2011A 4Q2010A QoQ % 2011A 2010A YoY % HF 2011E % deviation from HF
Total gold production, oz 151,562 249,866 (39,3%) 642,38 678,941 (5,4%) 625,000 2,8%
- Kumtor 138,696 228,433 (39,3%) 583,156 567,802 2,7% 575,000 1,4%
- Boroo 12,866 21,433 (40,0%) 59,224 111,139 (46,7%) 50,000 18,4%
Sources: company data, HF Research estimates       

 Preview of 2011 financial results

Based on 2011 production results and our assumptions, we estimate the company’s 2011 revenue to amount to $1019mn, EBITDA of $552mn, net income of $359mn and bottom-line EPS of $1.55/share. Our revenue estimate is in line with analyst consensus, while the EBITDA estimate is 10% above consensus.

We do not expect the company’s financial results due on February 24 to contain major surprises.

Figure 2. Forecast of 2011 financial results  
  HF 2011E 2010A YoY % Consensus estimate HF estimate compared to consensus
Revenue, $mn 1009 846 19% 1019 (1%)
EBITDA, $mn 607 471 29% 552 10%
EBIT, $mn 508 394 29% 455 12%
Net income, $mn 367 323 14% 359 2%
Net cash, $mn 545 413 32% 480 13%
Earnings per share 1,56 1,37 14% 1,55 0%
Sources: Company data, HF Research estimates  

 2012 guidance: higher capex, same output

This year, Centerra plans to produce 635,000-685,000 oz of gold (+35,000oz to 2011 guidance) at a total cost of $465-500/oz (same as last year). (See Fig.3.) The company sharply increased funds allocated for growth capex at Kumtor (+$159mn to the 2011 level). Growth capex of $328mn at Kumtor will be spent on renewal of the mining fleet, on walls’ management in the Central pit and on maintaining production levels, according to the company’s CEO.  

Figure 3. Centerra Gold's 2012 guidance  
 

Production,

koz

Total cash cost,

$/oz

Growth capex, $mn Sustaining capex, $mn
Kumtor 575 - 625 430-465 328 45
Boroo approx. 60 810 12 3
Corporate     - 1
Consolidated 635-685 465-500 340 49
Source: Company data   

Earlier this week unionized workers of Kumtor mine started an indefinite strike demanding that, in addition to the existing mandatory employer contribution to the Kyrgyz Republic's government-run Social Fund, Centerra also pays employee contributions to the fund, the company reported. We believe that Centerra will resolve the situation in the near future and will still meet its full-year production target.

F4_original.PNGIn line with the new guidance, we adjusted our valuation model by lowering 2012 production at Kumtor from 645koz to 600 koz and increasing the production forecast at Boroo from 42koz to 60koz. Our 2012 cash cost estimate for Kumtor is reduced from $494/oz to $448/oz, and the cost estimate for Boroo grew from $788/oz to $810/oz. The 2012-2019 cash cost CAGR is still assumed at 5%.

The $286mn increase in the 2012 capex estimate (to $389mn) subtracts almost 25%, or 3.9CAD per share, from our 12-month target price.

As a part of the in-house quarterly review process, we updated our gold price forecasts used in the model (see Fig.5). The change in gold price forecasts adds 2.4CAD per share bringing our 12-month target price of Centerra Gold to 14.3CAD per share.

Figure 5. Revision of gold price forecasts    
  2012 2013 2014 2015 2016 Long term
Old forecast 1 800 1 750 1 500 1 400 1 400 1 400
% growth 14,6% (2,8%) (14,3%) (6,7%) 0,0% 0,0%
New forecast 2 075 2 010 1 890 1 750 1 300 1 200
% growth 32,2% (3,1%) (6,0%) (7,4%) (25,7%) (7,7%)
Sources: HF Research estimates, Bloomberg    

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