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CG shares have been underperforming emerging market gold producers during the last six months as the conflict with Kyrgyz Republic escalated. Last week the parliament ordered the government to renegotiate Kumtor investment agreement within three months, seeking higher taxes, environmental fines, and participation in management. We revised our stock valuation to 7.2CAD per share and recommend to Hold.
Conflict with Kyrgyzstan escalates, economic costs to CG are yet unknown
The parliament demands higher taxes by about 60% relative to the 2009 Investment agreement, $0.5bn in environmental damages, participation of Kyrgyz nationals in the company’s management and higher local content requirements.
However, we believe that the government is unlikely to cook the hen that lays the golden eggs: the mine after all is the single largest contributor to the Kyrgyzstan’s budget. CG may have to be flexible as well coming given that over 90% of its revenue come from Kumtor. Therefore, we believe the parties will come to a mutually acceptable agreement. These two considerations leave plenty of room for bargaining along the contract curve. We, however, offer a somewhat sharper characterization of the expected outcome as a point somewhere between the status quo and the government’s wish list.
Production set to recover in 2013
In its 2013 guidance, the company estimated that production would rise in 2013 by 63.4% YoY, recovering from a low base. Should the company fulfill its production plans, we estimate the revenue to increase by 56.3% YoY to $1032mn, and the bottom line net income to reach $350mn. if the company meets its 2013 production and cost guidance, it will again become cash flow positive ($212mn – 2013E).