Despite A Setback Centerra Gold's Catalysts Poised To Propel Stock

| About: Centerra Gold (CAGDF)


Centerra Gold has produced more gold in 2015 than it has been guiding for.

The 2016 production numbers will be lower as the Kumtor mine will have to process lower grade ore in the first half of the year.

I expect the production guidance (480,000-530,000oz) and AISC-guidance ($877-968/oz) to be narrowed after the first semester of this year.

Centerra will spend $150M+ on the Oksut project, to reduce its exposure to the Kyrgyz situation.

A feasibility study at the Canadian Greenstone project can be expected around the summer as well, and this could be a major catalyst.


Centerra Gold (OTCPK:CAGDF) had a bumpy 2015. The company's intentions to solve the issues in the Kyrgyz Republic were definitely honorable but it doesn't look like the Kyrgyz government wants to play ball, so 2016 will be focused on getting as much cash out of the Kyrgyz Republic as possible and invest it in other, safer regions.

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Centerra Gold is a Canadian company and it might be a better idea to use the company's main listing on the Toronto Stock Exchange which offers a much better liquidity considering the average daily volume is approximately 1.1 million shares (for a dollar volume of around $5.5M). The ticker symbol in Canada is CG. The current market capitalization of Centerra Gold is approximately US$1.17B.

This was 2015…

Centerra Gold had quite a busy year as it was trying to outperform the expectations on all three important parts of the playing field. It was very important to try to push the Kumtor gold mine in the Kyrgyz Republic to its limits to maximize the gold production and the cash flow, whilst the company also aggressively pushed its Turkish development project and Canadian exploration project forward.

Source: company presentation

The mine performed pretty well in 2015 as Kumtor produced in excess of 520,000 ounces of gold, representing approximately 97% of Centerra's full-year gold production of almost 537,000 ounces. That's good, but it once again shows how depending Centerra is on the Kumtor mine and the rounds of arm-wrestling with the local government don't seem to be coming to an end.

Additionally, one of the company's employees have been deported after insulting the country's national dish. Of course, Centerra should not be held responsible for what one single employee has said, but it's obvious the company would have liked to avoid this situation as the Kyrgyz population is quite fond of its traditions.

… And this is what 2016 will be like

Okay, enough about the past. What really matters is the future, right?

Centerra now expects to produce 480,000-530,000 ounces of gold this year, and the entire gold production will come from the Kumtor mine. The guidance range is quite wide, but the explanation for a 50,000 ounce difference between the lower end and the upper end of the guidance is quite simple. At Kumtor, the average grade of the ore that will be mined and processed in the first half of the year will be quite low, whilst the higher grade SB zone will be mined at the end of the second quarter. However, a slight delay in the mine planning might cause the access of the SB zone to be delayed which would have an impact on the production results. So should Centerra Gold be able to reach the SB zone in time, I would expect the company to narrow down the production guidance for 2016. But for now, it's better to be safe than sorry and provide a very wide margin.

Click to enlarge

Source: company presentation

It also looks like the Kumtor mine will once again be quite profitable as the all-in sustaining costs on the consolidated level (including G&A expenses of the head office) should be around $877-968/oz. Again, a very wide margin which I expect to be narrowed down sometime later this year.

The positive cash flow from Kumtor will be quite welcome as Centerra has budgeted a large part of the capex for the new Oksut project in Turkey in 2016, expecting to spend $157M to build the mine. In the $157M, the company has included $134M of construction expenses, but also $23M in admin costs and other capitalized expenses. It will be interesting to see Centerra complete the Oksut project because this will a) put its huge cash position at work and b) reduce the company's reliance on the Kumtor mine in the Kyrgyz Republic, increasing its credibility on the markets.

Click to enlarge

Source: company presentation

This will already be really exciting, but what I'll really be looking forward is to see the final results of the feasibility study at the Greenstone property in Canada, where Centerra Gold has entered into a 50/50 joint venture with Premier Gold (OTCPK:PIRGF). Centerra has invested quite a bit of cash in this venture, and I'm confident it will be very interesting to see what the economics of the project will be in the upcoming feasibility study (which should be published around the summer period).

Investment thesis

I have quite a lot of respect for Centerra's management team as it has been working hard to reduce the company's exposure to a not-so-very-reliable/stable republic in middle Asia. For now, the company will have to put up with the local government as the Kumtor mine will be the only source of revenue and income for the company. Fortunately its humongous working capital position ($725M in the most recent financial update) will be a tremendous help in securing new projects and funding them.

I do expect the company to close more deals this year, as several sources have indicated Centerra has been sniffing around quite a few properties in North America, so it will be interesting to see if the company will dare to pull the trigger sometime this year. The catalysts for 2016 will be a) hopefully a long-term agreement to mine the Kumtor mine, b) a narrower guidance around the summer period once the high-grade zone at Kumtor will be reached and c) a positive feasibility study at the Greenstone project in Canada.

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