2011 results largely in line with HF estimates, slightly above consensus

Mariyam Zhumadil, CFAFebruary 24, 2012

Centerra Gold’s 2011 financial results are within 1% from our revenue, profitability and EPS forecasts and are slightly above consensus estimates. We maintain our 12-month target price of 14.3 CAD per share with a ‘Sell’ recommendation.

High gold prices drive 21% revenue growth
As we predicted full-year financial results did not contain surprises.  The company's revenue surged by 21% to $1,020mn on the back of a 27% increase in the average realized gold sale price, which was partially offset by a 5% decline in gold production volumes. Total cash cost increased by 14% to $502/oz due to higher costs at Kumtor mine associated with higher fuel costs, labor costs and social fund payments. 2011 net income grew by 15% to $371mn, while earnings per share were at $1.57. (See Figure 1.) The company’s net cash position grew by 38% to $568mn.

Figure 1. Overview of 2011 financial results        
  4Q2011 4Q2010 QoQ % 2011A 2010A YoY % HF 2011E 2011A above/below HF 2011E 2011 consensus estimates 2011A above/below consensus 
Revenue, $mn 248 322 (23%) 1020 846 21% 1009 1% 1019 0%
EBITDA, $mn 143 213 (33%) 612 471 29% 607 1% 552 11%
EBIT, $mn 113 192 (41%) 513 394 29% 508 1% 455 13%
Net income, $mn 79 151 (47%) 371 323 15% 368 1% 359 3%
Net cash, $mn - - - 568 413 38% 545 4% 480 18%
Earnings per share 0,34 0,64 (47%) 1,57 1,37 15% 1,56 1% 1,55 1%
                     
Average realized gold price, $/oz 1690 1376 23% 1569 1236 27% 1570 (0%) - -
Total cash cost, $/oz 603 308 96% 502 440 14% 496 1% - -
Sources: Company data, HF Research estimates        

CG replaced mined 2P reserves
On February 10, Centerra Gold reported updated reserve and resource estimate. The company’s proven and probable reserves increased by 694koz of contained gold, replacing the reserves mined in 2011 at Kumtor. Measured and indicated resources rose by 36.3% to 6653koz of contained gold thanks to the addition of new resources from the ATO project in Mongolia and the Kara Beldyr JV in Russia. Exploration drilling at high-grade underground SB Zone and at the Kara Beldyr JV was the key contributor to the 16% increase in inferred resources estimate.

Figure 2. Reconciliation of reserves and resources
  Dec. 2010 2011 throughput 2011 addition (deletion) Dec. 2011
Proven and probable reserves        
- Kumtor 6283 709 704 6278
- Boroo 392 84 -10 298
- Gatsuurt 1489 0 0 1489
Total 8164 793 694 8065
Measured and indicated resources      
- Kumtor 4134 0 665 4799
- Boroo 242 0 0 242
- Gatsuurt 426 0 0 426
- Ulaan Bulag 80 0 -7 73
- ATO 0 0 824 824
- Kara Beldyr 0 0 289 289
Total 4882 0 1771 6653
Inferred resources        
-Kumtor open pit 759 0 -65 694
-Kumtor Stockwork underground 628 0 1 629
-Kumtor SB underground 1367 0 393 1760
- Boroo 233 0 2 235
- Gatsuurt 491 0 0 491
- Ulaan Bulag 11 0 2 13
- ATO 0 0 26 26
- Kara Beldyr 0 0 211 211
Total  3489 0 570 4059
Sources: company data

HF view
We note Centerra’s progress in its exploration program at ATO project in eastern Mongolia and at Kara Beldyr project in Russia. The company’s balance sheet remains solid with no debt and $568mn of cash on hand. During 2011, the company’s operating activities in Mongolia effectively remained suspended, and there is no certainty as to the timing of receipt of heap leach production license at Boroo and mining license at Gatsuurt. Despite the company’s strong performance in 2011 Centerra’s production growth prospects remain uncertain. To maintain its output at the current level, Centerra plans to increase sustaining capital expenditures at Kumtor mine, starting from 2012. We maintain our ‘Sell’ recommendation on the stock with a 12-month target price of 14.3 CAD per share.