Centerra Gold Reports 2011 Results; Fourth Quarter Net Earnings $79 million or $0.34 per share, 2011 Net Earnings $371 million or $1.57 per share (This news release contains forward-looking information that is subject to assumptions and risk factors set out on page 18 and in our
NEWS RELEASE Centerra Gold Reports 2011 Results;
Fourth Quarter Net Earnings $79 million or $0.34 per share, 2011 Net Earnings $371 million or $1.57 per share
(This news release contains forward-looking information that is subject to assumptions and risk factors set out on page 18 and in our Cautionary Note Regarding Forward-looking Information on page 26. Prior period comparative numbers have been adjusted to reflect current IFRS reporting standards. All figures are in United States dollars.)
To view the 2011 Management’s Discussion and Analysis and the Audited Financial Statements and Notes for the year-ended December 31, 2011, please visit the following link:
http://media3.marketwire.com/docs/CG2011MDAFS.pdf
Toronto, Canada, February 23, 2012: Centerra Gold Inc. (TSX: CG) today reported fourth quarter 2011 net earnings of $79.4 million or $0.34 per common share based on revenues of $248.0 million, compared to net earnings of $150.8 million or $0.64 per common share on revenues of $322.3 million in the same quarter of 2010 due to lower gold sales in the period. Fourth quarter of 2010 results reflect the back-ended production profile at Kumtor, which accounted for 40% of Kumtor’s annual gold production and 37% of its gold sales for the year.
Centerra’s consolidated gold production for the fourth quarter of 2011 totalled 151,562 ounces at a total cash cost of $603 per ounce produced compared to 249,866 ounces at a total cash cost of $308 per ounce produced in the corresponding quarter of 2010. During the fourth quarter 2011, production was lower at both Boroo and Kumtor as planned, when compared to the fourth quarter of 2010. (Total cash cost per ounce produced is a non-GAAP measure and is discussed under “Non-GAAP Measures” in this news release.)
Cash provided by operations in the fourth quarter of 2011, net of working capital changes and other operating items was $60.3 million compared to $129.5 million in the fourth quarter of 2010. The decrease reflects lower earnings due to lower gold sales as a result of the lower production in the quarter.
2011 Fourth Quarter Highlights
- Achieved milestone of $1 Billion revenue in 2011.
- Replaced reserves mined at Kumtor.
- Proven and probable gold reserves total 8.1 million ounces of contained gold.
- Initial resources reported for ATO in Mongolia and the Kara Beldyr joint venture in Russia.
- Earned a 50% interest in the Öksüt joint venture project in Turkey, which has returned significant
intercepts of oxidized gold mineralization.
1 University Avenue, Suite 1500 Toronto, ON M5J 2P1 tel 416-204-1953 fax 416-204-1954 www.centerragold.com
- Centerra became a supporting company of the Extractive Industries Transparency Initiative (“EITI”) which promotes good governance and responsible mining. Both Kumtor and Boroo have played an active role in promoting the EITI in the Kyrgyz Republic and Mongolia.
In 2011, the Company recorded net earnings of $370.9 million or $1.57 per common share on revenues of $1,020.3 million reflecting a 27% increase in the realized gold price in the year, partially offset by lower gold ounces sold, other settlement payments and the contribution to community development projects. Net earnings for 2010 were $322.3 million or $1.37 per share on revenues of $849.8 million. The 2010 comparative year included a gain of $34.9 million on the sale of the REN exploration property in Nevada, USA.
Consolidated 2011 gold production was 642,380 ounces at a total cash cost of $502 per ounce produced, compared with consolidated gold production of 678,941 ounces at a total cash cost of $440 per ounce produced for the prior year. (Total cash cost per ounce produced is a non-GAAP measure and is discussed under “Non-GAAP Measures” in this news release.)
During 2011, cash provided by operations was $434.9 million or $1.84 per share up from $281.0 million or $1.19 per share in 2010, reflecting the higher net earnings, primarily as a result of the higher average gold price realized.
Commentary
Stephen Lang, President and CEO of Centerra Gold commented, “2011 was a very good year for the Company. We achieved our gold production guidance for the year, replaced reserves and with the strong gold prices the operations generated cash flow of $435 million or $1.84 per share for the year and achieved for the first time revenue of over $1 billion. During the year, we continued to expand our exploration efforts which are paying off with new exploration discoveries such as ATO in eastern Mongolia, to delivering new resources on some of our joint venture properties such as Kara Beldyr in Russia. Centerra ended the year with a balance sheet that includes $568 million in cash and short-term investments and no debt outstanding.”
“For 2012, consolidated gold production is expected to be in the 635,000 to 685,000 ounce range and total cash costs are expected in the $465 to $500 per ounce range. The production profile at Kumtor differs from last year in that it will be significantly weighted to the fourth quarter, when we expect to recover 43% of the gold production.”
Year-end Gold Reserves and Resources Reserves
As reported in the Company’s news release of February 9, 2012, Centerra’s proven and probable reserves as of December 31, 2011, increased 694,000 contained ounces (before accounting for 2011 production) to 8.1 million ounces of contained gold, compared to 8.2 million ounces as of December 31, 2010. This represents an increase of 9% before accounting for 793,000 contained ounces processed at Kumtor and Boroo during 2011. All 2011 year-end reserves were estimated using a gold price of $1,200 per ounce compared to $1,000 per ounce at December 31, 2010.
Resources
As of December 31, 2011, Centerra’s measured and indicated resources increased by 36% or 1.8 million ounces over the December 31, 2010 figures to total 6.7 million ounces of contained gold, compared to 4.9 million contained ounces as of December 31, 2010. The increase from the 2010 year-end measured and indicated resources is attributable to a 329,000 contained ounce increase in resources at Kumtor together with the initial resource estimate for the ATO project in Mongolia which has a measured and indicated resource of 824,000 ounces of contained gold together with significant silver, lead and zinc and a resource estimate on a 100% basis for the Gord Zone on the Kara Beldyr joint venture project in Russia which has an indicated resource of 289,000 ounces of contained gold.
The Company’s inferred resources also increased by 570,000 contained ounces of gold year-over-year. The majority of the inferred resources are at Kumtor, in the high-grade underground SB Zone which totals 1.8 million contained ounces of gold with an average grade of 13.6 g/t and in the high-grade underground Stockwork Zone which totals 629,000 contained ounces of gold with an average grade of 12.0 g/t.
Financial and Operating Summary Highlights
| Three Months Ended December 31 | Year Ended December 31 | |||||
|---|---|---|---|---|---|---|
| Financial and Operating Summary | 2011 | 2010 | % Change | 2011 | 2010 | % Change |
| Revenue - $ millions | 248.0 | 322.2 | (23%) | 1,020.3 | 849.8 | 20% |
| Cost of sales - $ millions (1) | 104.1 | 89.6 | 16% | 382.3 | 342.2 | 12% |
| Earnings before other income - $ millions (2) | 79.4 | 150.8 | (47%) | 370.9 | 287.4 | 29% |
| Earnings per common share before other income - $ basic and diluted | 0.34 | 0.64 | (47%) | 1.57 | 1.22 | 29% |
| Other income - $ millions | - | - | - | - | 34.9 | (100%) |
| Net earnings - $ millions | 79.4 | 150.8 | (47%) | 370.9 | 322.3 | 15% |
| Earnings per common share - $ basic and diluted | 0.34 | 0.64 | (47%) | 1.57 | 1.37 | 15% |
| Cash provided by operations - $ millions | 60.3 | 129.5 | (53%) | 434.9 | 281.0 | 55% |
| Capital expenditures -$ millions | 30.0 | 55.4 | (46%) | 187.9 | 212.0 | (11%) |
| Weighted average common shares outstanding - basic (thousands) (3) | 236,323 | 235,790 | 0% | 236,088 | 235,488 | 0% |
| Weighted average common shares outstanding - diluted (thousands) (3) | 236,621 | 236,266 | 0% | 236,354 | 235,862 | 0% |
| Average gold spot price - $/oz | 1,688 | 1,367 | 23% | 1,572 | 1,225 | 28% |
| Average realized gold price - $/oz | 1,690 | 1,376 | 23% | 1,569 | 1,236 | 27% |
| Gold sold – ounces | 146,704 | 234,148 | (37%) | 650,258 | 687,706 | (5%) |
| Cost of sales - $/oz sold | 709 | 383 | 85% | 588 | 498 | 18% |
| Gold produced – ounces | 151,562 | 249,866 | (39%) | 642,380 | 678,941 | (5%) |
| Total cash cost(4) (5) - $/oz produced | 603 | 308 | 96% | 502 | 440 | 14% |
| Total production cost(4) (5) - $/oz produced | 820 | 401 | 104% | 687 | 555 | 24% |
(1) Cost of sales excludes regional office administration.
(2) Net earnings before other income is a non-GAAP measure.
(3) As of December 31, 2011, the Company had 236,339,041 common shares issued and outstanding.
(4) Total cash cost and total production cost are non-GAAP measures and are discussed under “Non-GAAP Measures”.
(5) As a result of Kumtor's Restated Investment Agreement signed in 2009, total cash cost and total production cost per ounce measures exclude operating and revenue-based taxes.
Revenue in the fourth quarter of 2011 was $248.0 million compared to $322.2 million during the same period the previous year. Fourth quarter 2011 revenue reflects a 37% decrease in ounces sold (146,704 ounces in the fourth quarter 2011 versus 234,148 ounces in the fourth quarter of 2010). Lower ounces sold in the fourth quarter of 2011 were partially offset by a higher realized gold price ($1,690 per ounce in the fourth quarter of 2011 versus $1,376 per ounce in the fourth quarter of 2010).
The Company produced 151,562 ounces in the fourth quarter of 2011, 39% less than the same period in 2010 due to lower grades and recoveries at both Boroo and Kumtor. The Boroo production in the fourth quarter of 2011 was 8,567 ounces lower compared to the same period of 2010 due to lower grades and lower recovery of the stockpiled ore processed by the mill. The Kumtor production in the fourth quarter of 2011 was 89,737 ounces lower compared to the same period of 2010 when the production profile was back ended in the fourth quarter and the mill processed higher grade material (averaging 7.1 g/t). The majority of the mill feed processed by Kumtor in the fourth quarter of 2011 had an average mill head grade of 3.8 g/t and lower recovery (77.6% vs. 84.1%) than the comparative quarter in 2010, which reflects the higher mill head grade processed.
Total cash cost per ounce produced was $603 in the fourth quarter of 2011 compared to $308 per ounce in the same period of 2010 after allocation of costs to capitalized pre-stripping. The higher unit costs were a result of the 39% decrease in gold production combined with 19% higher cash operating costs. Gold production in the fourth quarter of 2011 was significantly down by 98,304 ounces or 39%, reflecting lower grades processed primarily from stockpiles at Kumtor compared to the high-grade material from cut-back 12B mined and processed in the fourth quarter of 2010, lower grade material processed at Boroo in the fourth quarter of 2011, and lower recoveries at both sites. Total cash operating costs of $91.4 million in the fourth quarter of 2011 were $14.4 million or 19% higher than the $77.7 million in the same period in 2010 reflecting a larger equipment fleet which increased throughput to move significantly higher levels of rock waste and ice at Kumtor. The higher costs are due to increased mining activity at Kumtor which includes higher diesel consumption and costs ($6.3 million including a $1.9 million effect due to the price increasing from US$0.68 to US$0.76 cents), higher national labour cost due to the increased workforce and social fund payments as discussed in “Other Corporate Developments” ($3.4 million), and higher costs for explosives ($1.8 million) of which $1.4 million is a result of a higher purchase price and higher maintenance, tire and lubricant costs due to the expanded fleet ($1.5 million), lower allocation of service equipment ($0.7 million) and other increases of $1.0 million. (Total cash cost per ounce produced is a non-GAAP measure and is discussed under “Non- GAAP Measure – Total Cash Cost.”)
Cash provided by operations was $60.3 million for the fourth quarter of 2011 compared to $129.5 million for the fourth quarter of the prior year. The decrease reflects primarily lower earnings from lower production in the fourth quarter of 2011.
Exploration expenditures for the fourth quarter were $11.7 million dollars compared to $11.2 million in the fourth quarter of 2010 reflecting higher spending at the Kumtor property, the ATO project in Mongolia and at the Kara Beldyr joint venture project in Russia. For a detailed update on fourth quarter exploration activities please refer to the Company’s news release of February 9, 2012.
Capital expenditures in the fourth quarter of 2011 totalled $30.0 million of which $9.0 million was spent and accrued on sustaining capital projects and $21.0 million invested in growth capital. The major growth components are related to the underground development project at Kumtor ($11.1 million) and the capitalized pre-stripping for cut-back 14A ($8.3 million) at Kumtor. In addition, the Company spent $0.3 million at Boroo and the Gatsuurt in the fourth quarter of 2011 on raising the main cell of the tailings dam to process Boroo ores. Capital expenditures in the same quarter of 2010 were $55.4 million, which included $9.4 million spent and accrued on sustaining capital projects and $46.0 million invested in growth capital.
Full Year 2011
For the full year 2011, revenue increased by $170.6 million, or 20%, to $1,020.3 million compared to $849.8 million in the same period of 2010 primarily due to a 27% increase in the realized gold price partially offset by fewer ounces sold. The average realized gold price for 2011 was $1,569 per ounce compared to $1,236 per ounce in the same period of 2010 reflecting higher spot prices for gold throughout the year. Gold sold in 2011 totalled 650,258 ounces (599,494 ounces from Kumtor and 50,764 ounces from Boroo), compared to 687,706 ounces sold in 2010 (568,390 ounces from Kumtor and 119,316 ounces from Boroo).
Gold production was within the Company’s guidance at 642,380 ounces in 2011 compared to the 678,941 ounces reported in 2010. The 5% decrease in gold production in 2011 was due to lower production at Boroo. Production at Boroo was 47% lower in 2011 as a result of lower head grades and recoveries processed through the mill. At Boroo, the ore was more refractory than expected during 2011 and the grades and recoveries continued to decline throughout the year. Mining activities at Boroo ceased December 1, 2010 but have resumed in January 2012.
The heap leach operation at Boroo remained idle during 2011 pending issuance of the final operating permit by the government authorities.
Total cash cost per ounce produced for 2011 increased to $502 compared to $440 per ounce in 2010. (Total cash cost per ounce produced is a non-GAAP measure and is discussed under “Non-GAAP Measures”.) The increase in 2011 reflects the impact of lower production levels due to lower grades and recoveries and higher operating costs at Kumtor as discussed in the “Results of Operating Segments” for Kumtor and Boroo.
Exploration expenditures in 2011 were $39.6 million compared to $31.3 million in 2010 reflecting higher spending in Mongolia and an increase in exploration activities elsewhere.
Other operating expenses in 2011 were $15.5 million compared to $8.0 million in the prior year. The 2011 expense includes $12.6 million for donations and sustainable development contributions made in both the Kyrgyz Republic and Mongolia ($8.7 million in 2010), the settlement in the amount of $2.6 million relating to a claim with government authorities in Mongolia regarding alluvial reserves on the Boroo project licenses (see “Other Corporate Developments – Mongolia”), the net income of $0.1 million ($0.7 million in 2010) related to the production of alluvial reserves at the Boroo property and various other community-based sustainability projects supported by both operations. The results also include corporate sustainability spending by Kumtor totalling $10.0 million in 2011 for the construction and repair of 27 schools throughout the Kyrgyz Republic, while in 2010 Boroo funded the construction of a maternity hospital in Ulaanbaatar in the amount of $6.4 million.
Net earnings for 2011 were $370.9 million or $1.57 per share compared to $322.3 million or $1.37 per share in 2010. The increase reflects a 27% increase in the realized gold price in the year, partially offset by lower gold ounces sold, the settlement of $14.1 million with the Kyrgyz Social Fund, the settlement with the Mongolian government of $2.6 million for the alluvial claim and the contribution of $10 million to the Kyrgyz government for the construction and repair of 27 schools in the country (see “Other Corporate Developments”). The 2010 comparative year included a gain of $34.9 million on the sale of the REN exploration property in Nevada, USA, partially offset by the contribution of $6.4 million by Boroo to the construction of a maternity hospital in Ulaanbaatar.
Cash flow provided from operations for 2011 was $434.9 million compared to $281.0 million in 2010, primarily as a result of higher earnings and lower working capital levels at the end of the year.
For the year 2011, capital expenditures totalled $187.9 million of which $34.6 million was spent and accrued on sustaining capital projects and $153.3 million invested in growth capital. The major growth capital components are related to spending at Kumtor mainly on fleet expansion and pre-stripping of waste ($148.5 million), the SB and Stockwork Zone underground development at Kumtor ($43.9 million), and raising the tailings dam at Boroo ($4.5 million). For the full year 2010, capital expenditures (spent and accrued) totaled $212.0 million, which included $44.0 million of sustaining capital and $168.0 million of growth capital.
As at December 31, 2011, the Company had no outstanding debt and has an undrawn $150 million revolving credit facility with the European Bank for Reconstruction and Development (“EBRD”) to support future growth initiatives. Net cash and short-term investments increased to $568.2 million from $413.0 million at December 31, 2010.
Operations Update Summary of Key Operating Results
| Three Months Ended December 31 | Year Ended December 31 | |||||
|---|---|---|---|---|---|---|
| Kumtor Operating Results | 2011 | 2010 | % Change | 2011 | 2010 | % Change |
| Revenue - $ millions | 239.7 | 288.9 | (17%) | 941.1 | 704.3 | 34% |
| Gold sold – ounces | 141,897 | 209,929 | (32%) | 599,494 | 568,390 | 5% |
| Average realized gold price – $/oz | 1,689 | 1,376 | 23% | 1,570 | 1,239 | 27% |
| Cost of sales - $ millions (1) | 96.9 | 72.1 | 34% | 332.6 | 272.4 | 22% |
| Cost of sales - $/oz sold | 683 | 343 | 99% | 555 | 479 | 16% |
| Tonnes mined - 000s | 37,124 | 29,561 | 26% | 150,605 | 116,466 | 29% |
| Tonnes ore mined – 000s | 1,095 | 2,812 | (61%) | 6,020 | 5,765 | 4% |
| Tonnes milled - 000s | 1,450 | 1,303 | 11% | 5,815 | 5,594 | 4% |
| Average mill head grade - g/t (2) | 3.80 | 7.06 | (46%) | 3.79 | 4.02 | (6%) |
| Recovery - % | 77.6 | 84.1 | (8%) | 80.8 | 79.5 | 2% |
| Gold produced – ounces | 138,696 | 228,433 | (39%) | 583,156 | 567,802 | 3% |
| Total cash cost (3) (4) - $/oz produced | 580 | 261 | 122% | 482 | 409 | 18% |
| Total production cost (3) (4)-$/oz produced | 808 | 349 | 132% | 673 | 513 | 31% |
| Capital expenditures - $ millions | 28.5 | 53.3 | (47%) | 180.7 | 186.5 | (3%) |
| Boroo Operating Results | ||||||
| Revenue - $ millions | 8.3 | 33.3 | (75%) | 79.3 | 145.5 | (46%) |
| Gold sold – ounces | 4,807 | 24,219 | (80%) | 50,764 | 119,316 | (57%) |
| Average realized gold price - $/oz | 1,719 | 1,374 | 25% | 1,562 | 1,219 | 28% |
| Cost of sales - $ millions (1) | 7.2 | 17.5 | (59%) | 49.7 | 69.8 | (29%) |
| Cost of sales - $/oz sold | 1,504 | 724 | 108% | 979 | 585 | 67% |
| Total tonnes mined - 000s | 0 | 2,717 | (100%) | 0 | 11,358 | (100%) |
| Tonnes mined heap leach – 000s | 0 | 196 | (100%) | 0 | 1,694 | (100%) |
| Tonnes ore mined direct mill feed -000’s | 0 | 325 | (100%) | 0 | 2,399 | (100%) |
| Tonnes ore milled - 000s | 629 | 633 | (1%) | 2,340 | 2,466 | (5%) |
| Average mill head grade - g/t (2) | 1.09 | 1.53 | (29%) | 1.11 | 1.86 | (40%) |
| Recovery - % | 66.5 | 69.0 | (4%) | 68.9 | 71.8 | (4%) |
| Gold produced – ounces | 12,866 | 21,433 | (40%) | 59,224 | 111,139 | (47%) |
| Total cash cost (3) - $/oz produced | 849 | 810 | 5% | 694 | 601 | 15% |
| Total production cost (3)-$/oz produced | 951 | 959 | (1%) | 828 | 770 | 8% |
| Capital expenditures (Boroo) - $ millions | 1.1 | 1.0 | 9% | 6.3 | 7.9 | (20%) |
| Capital expenditures (Gatsuurt) - $ millions | 0.0 | 0.9 | (97%) | 0.3 | 17.2 | (98%) |
(1)
Cost of sales for 2010 and its comparative years exclude regional office administration.
(2)
g/t means grams gold per tonne.
(3)
Total cash cost and total production cost are non-GAAP Measures and are discussed under “Non-GAAP Measures”.
(4)
Kumtor’s total cash cost and total production cost per ounce measures exclude operating and revenue-based taxes.
Kumtor
At the Kumtor mine, gold production was 138,696 ounces in the fourth quarter of 2011, compared to 228,433 ounce in the same quarter in 2010 when the production profile was back-ended for the year. The lower production in 2011 was the result of lower grades processed, primarily from stockpiles, compared to the highgrade material in the fourth quarter of 2010 with the associated lower recoveries and a production profile in 2011 which had consistent quarterly production. The mill head grade in the fourth quarter of 2011 averaged 3.8 g/t with a recovery of 77.6% compared to 7.06 g/t with a recovery of 84.1% in the same quarter of 2010.
Total cash cost per ounce produced, a non-GAAP measure of production efficiency, was $580 in the fourth quarter compared to $261 a year earlier. The quarter-over-quarter increase in total cash cost was primarily due to lower gold production and higher operating costs. Operating costs (before allocation to capitalized prestripping) increased by $17.9 million or 28% primarily due to higher mining costs (up $14.7 million), higher milling costs ($1.3 million) and higher site administration costs ($1.9 million). The higher mining costs of $14.7 million or 39% compared to the same quarter in 2010 reflects the higher mining rate achieved during the fourth quarter of 2011 where 26% more tonnes of waste and ore were moved with Kumtor’s expanded mining fleet. The higher costs are due to the increased mining activity which includes diesel ($6.3 million including a $1.9 million effect due to the price increasing from US$0.68 to US$0.76 cents), national labour cost due to increased workforce and social fund payments as discussed in “Other Corporate Developments” ($3.4 million), and higher costs for explosives ($1.8 million) of which $1.4 million is a result of a higher purchase price and higher maintenance, tire and lubricant costs due to the expanded fleet ($1.5 million), lower allocation of service equipment ($0.7 million) and other increases of $1.0 million. The milling and site administration costs increased due to higher national labour, reagents and diesel costs.
Exploration expenditures totaled $2.7 million for the fourth quarter of 2011, compare to $3.7 million in the fourth quarter 2010.
During the fourth quarter of 2011, capital expenditures were $28.4 million, which included $7.8 million of sustaining capital spent mainly on the heavy equipment overhaul program ($4.6 million), shear key, buttress and tailings dam construction ($0.9 million) and other projects ($2.3 million). Growth capital investment totalled $20.7 million mainly on pre-strip capitalization ($8.3 million), the underground development ($11.2 million) and other equipment and projects ($1.2 million).
The underground development at Kumtor continued in the fourth quarter of 2011 with a total advance of 470 metres. Year-to-date total development advance was 1,864 metres, which includes 903 metres advance in Decline #1 and 961 metres in Decline #2. The Stockwork Drive reached its design limit in October 2011 and delineation drilling of the Stockwork Zone is ongoing. The underground development project at Kumtor is on track to achieve the connection of Decline #1 with Decline #2 in the third quarter of 2012. Decline #1 has approximately 125 metres of development advance remaining and Decline #2 has approximately 660 metres of development advance remaining to join the two declines. An additional 708 metres of development advance is required in order to access the SB Zone. First ore from the SB Zone is expected in the second quarter of 2013.
Boroo & Gatsuurt
At the Boroo mine in the fourth quarter of 2011, gold production was 12,866 ounces 40% lower than the same period in 2010. The lower gold production was primarily due to lower grade material processed which had an average mill head grade of 1.09 g/t and lower recovery of 66.5%, compared to the average mill head grade of 1.53 g/t and a recovery of 69.0% in the fourth quarter of 2010.
Total cash costs per ounce produced, a non-GAAP measure of production efficiency, increased to $849 in the fourth quarter of 2011 from $810 in the fourth quarter of 2010. The quarter-over-quarter increase in unit cash cost per ounce produced was due to 40% lower gold production in the fourth quarter of 2011 compared to the prior year period.
Operating costs at Boroo were down $5.9 million quarter-over-quarter primarily due to reduced costs for mining ($4.6 million), heap leaching ($0.4 million) and royalties ($1.3 million), partially offset by an increase in milling costs ($0.4 million). The mining costs were lower as Boroo ceased mining activities at the end of November 2010. Heap leaching costs were $0.4 million lower as no crushing and stacking activities occurred starting in the fourth quarter of 2010, and the recirculation of solution was stopped in the fourth quarter of 2011. Royalties decreased in 2011 due to the 57% fewer ounces sold in the 2011 fourth quarter.
During the fourth quarter of 2011 exploration expenditures in Mongolia increased to $4.2 million from $3.4 million in the same period in 2010. The majority of the exploration work in the fourth quarter 2011 was conducted at the ATO property in eastern Mongolia.
During the fourth quarter of 2011, capital expenditures at Boroo were $1.2 million, $0.9 million of sustaining capital and $0.3 million of growth capital on raising the main cell of the tailings dam to process Boroo ores.
Minimal capital spending is planned on the Gatsuurt project going forward while waiting for the final approvals and regulatory commissioning to commence mining.
Other Corporate Developments
Kyrgyz Republic
As previously disclosed, Kumtor Operating Company (“KOC”), the Company’s Kyrgyz Republic operating subsidiary was in a dispute with the Kyrgyz Republic Social Fund (the “Social Fund”) regarding whether Social Fund contributions were required to be paid with respect to a high-altitude premium payable to KOC employees. This dispute began in 2010 and eventually led to KOC filing a claim in September 2011 to invalidate an assessment issued by the Social Fund requiring KOC to pay approximately $6.7 million in contributions owing for the 2010 operating year. The matter was resolved in the third quarter of 2011 when KOC and the Social Fund reached an agreement whereby Kumtor would voluntarily pay to the Social Fund $14.1 million, covering the 2010 operating year ($6.7 million) and the first nine months of 2011 ($7.4 million), without any penalties, fines and financial sanctions and agreed to apply the Social Fund contribution to the high altitude premium in the future. Going forward, KOC will pay the employer’s portion of the Social Fund contribution for the high altitude premium and the employees will be responsible for the employee portions of such deduction.
On October 30, 2011, the Kyrgyz Republic held presidential elections which were won by the former Prime Minister Almazbek Atambayev of the Social Democratic Party of Kyrgyzstan, in the first round.
On December 5, 2011, the Company announced that it was experiencing an interruption in the transfer of diesel fuel and other supplies from the Kumtor marshalling yard to the mine site due to an illegal roadblock. The marshalling yard is located in the town of Balykchy in the Issyk-Kul Region of the Kyrgyz Republic and is approximately 270 kilometres from the Kumtor mine. The road block was voluntarily lifted on December 6, 2011 and the transfer of diesel fuel and other supplies resumed. The interruption did not affect the Company’s 2011 production and cost guidance, nor were the mine or milling operations affected.
Kumtor’s collective bargaining agreement expires at the end of 2012. A related work stoppage during 2012 could have a significant impact on Kumtor achieving its forecasted production (see “Risk Factors”).
On February 6, 2012 unionized employees at Kumtor began an illegal strike following a dispute regarding social fund deductions. Production at the Kumtor operation was suspended. On February 16, 2012 an agreement was reached with the Kumtor Trade Union and unionized employees returned to work. The cost of the settlement for 2012 will be approximately $4 million. The impact of the strike on production is being evaluated.
Mongolia
In the fourth quarter of 2011, Centerra’s wholly owned subsidiary, Boroo Gold LLC, which owns the Boroo project, resolved the previously disclosed very significant claim for compensation that it received from the Mongolian General Department of Specialized Inspection (“SSIA”) in October 2009 following the June 2009 inspection at the Boroo project. The claim related to certain mineral reserves, including state alluvial reserves, covered by the Boroo project licenses, that are recorded in the Mongolian state reserves registry, but for which there are no or incomplete records or reports of mining activity. Pursuant to the resolution, Boroo Gold LLC accrued approximately $2.6 million in the 2011 year-end results and subsequently paid the amount in January 2012. While this claim has been resolved, other regulatory issues remain outstanding in Mongolia, including the issuance of a final heap leach permit. The Company continues to have discussions with regulatory officials regarding the issuance of the permit. See “Risk Factors”.
As previously disclosed, the Mongolian Parliament enacted the Law to Prohibit Mineral Exploration And Mining Operations At River Headwaters, Protected Zones Of Water Reservoirs And Forested Areas (the “Water and Forest Law”) in 2009. Under the Water and Forest Law, mineral prospecting, exploration and mining in water basins and forestry areas in Mongolia are prohibited, and the affected licenses are subject to revocation. The legislation provides a specific exemption for “mineral deposits of strategic importance”, which exempts the Boroo hard rock deposit from the application of the legislation. Centerra’s Gatsuurt licenses and its other exploration license holdings in Mongolia however, are currently not exempt. Under the Minerals Law of Mongolia, Parliament on its own initiative or, on the recommendation of the Government, may designate a mineral deposit as strategic. Such designation could result in Mongolia receiving up to a 34% interest in the Gatsuurt deposit.
In 2010, the Company received correspondence from the Minerals Resource Authority of Mongolia (“MRAM”) stating that certain of its mining and exploration licenses, including the Gatsuurt mining licenses, could be revoked under the Water and Forest Law. In 2010, the Company was also informed by the Ministry of Mineral Resources and Energy (“MMRE”) that since the Gatsuurt licenses were within the area designated, on a preliminary basis, as land where mineral mining is prohibited under the Water and Forest Law, and that the MMRE would communicate further with the Company on negotiations with respect to an investment agreement for the Gatsuurt project once the MMRE received additional clarity on the impact of the Water and Forest Law on the Gatsuurt project. In November 2010, the Company also received a letter from the MMRE indicating that operations at the Gatsuurt project cannot be commenced while the implementation of the Water and Forest Law is being resolved. Accordingly, it is anticipated that further approvals and regulatory commissioning of Gatsuurt will be delayed as a result of the Water and Forest Law.
In November 2010, the Mongolian cabinet announced its intention to initiate the revocation of 1,782 mineral licenses under the Water and Forest Law on a staged basis, beginning with the revocation of 254 alluvial gold mining licenses, the list of which was finalized by the Mongolian Parliament in 2011. The Company has three licenses on the list of alluvial gold mining license that may be revoked. None of these licenses are material to the Company. In particular, the Company’s principal Gatsuurt hardrock mining licenses are not on the list of alluvial licenses to be revoked. In accordance with the Water and Forest Law, the Company submitted in February 2011 a formal request for compensation for the three licenses to be revoked, which requests were updated again in January 2012 as a result of the finalization of the list.
The Mongolian Government announced in 2010 that it is considering taking the following actions as the next stages of its implementation of the Water and Forest Law:
- preparing and submitting to the cabinet a proposal to designate as “strategic” those deposits, the development of which would contribute to regional social and economic development and, at the same time, require significant amounts of compensation;
- revoking all licenses for non-gold mining operations which utilize surface water;
- revoking all 460 gold exploration licenses and providing compensation;
- revoking all 931 non-gold exploration licenses and providing compensation;
- revoking and providing compensation to all remaining affected mining licenses.
Of the Company’s 55 mineral licenses, 36 licenses (including the Gatsuurt hard rock licenses) are included in the 1,782 licenses referred to in the cabinet announcement as subject to staged revocation.
The Company understands that Mongolia’s cabinet expects that the Water and Forest Law will take until approximately November 2012 to fully implement. According to statements by officials, the Mongolian Government estimates that the total compensation due to mining companies for the revocation of their licenses will amount to approximately US$4 billion, representing a very substantial part of Mongolia’s annual gross domestic product for 2010.
The Water and Forest Law has attracted opposition from Mongolia’s alluvial miners, the Mongolian National Mining Association and other groups. A group of parliamentarians proposed amendments to the Water and Forest Law in 2011 to reduce its impact on environmentally-sound mining operations. The Company understands that as drafted, such amendments would allow the Gatsuurt project to proceed. Such amendments were discussed by a Mongolian parliamentary committee in 2011 which then referred it to Parliament for further discussion. The Parliament did not discuss the amendment during the 2011 but such amendments may be tabled for discussion in 2012.
Centerra is reasonably confident that the economic and development benefits resulting from its exploration and development activities will ultimately result in the Water and Forest Law having a limited impact on the Company’s Mongolian activities. There can be no assurance, however, that this will be the case. Unless the Water and Forest Law is repealed or amended such that the law no longer applies to the project or Gatsuurt is designated as a “mineral deposit of strategic importance” that is exempt from the Water and Forest Law, mineral reserves at Gatsuurt may have to be reclassified as mineral resources or eliminated entirely and the Company may be required to write-off the associated investment in Gatsuurt and Boroo. As at December 31, 2011, the Company had net assets recorded amounting to approximately $36 million related to the investment in Gatsuurt and approximately $25 million remaining capitalized for the Boroo mill facility and other surface structures which are expected to be utilized for the processing of ore from Gatsuurt. Although the Company expects to exploit the Gatsuurt deposit, should this not be the case, the Company would be required to writeoff these amounts. A revocation of the Company’s mineral licenses, including the Gatsuurt mineral license, or the reclassification of mineral reserves or the write-off of assets could have an adverse impact on Centerra’s future cash flows, earnings, results of operations and financial condition.
The heap leach operation at Boroo remained idle during the fourth quarter of 2011 awaiting issuance of the final operating permit from the Mongolian Government. Unless the Company is successful in obtaining the final heap leach operating permit, it will be required to write-off the associated investment which totals $15.9 million at December 31, 2011.
In November 2010, the Mongolian Parliament passed amendments to its Minerals Law that modified the existing royalty structure on mineral projects. Pursuant to the amended royalty structure, the royalty rate is no longer a fixed percentage but is graduated and dependent upon the commodity price in US dollars. In the case of gold, there is a basic 5% royalty fee that applies while gold is less than $900 per ounce. For any increase of $100 to the price of gold, there is a corresponding 1% increase to the royalty fee. Accordingly, at $900 per ounce, the royalty fee increases to 6% which continues until the gold price reaches $1,000 per ounce at which point, the royalty increases to 7%, at $1,100 per ounce, the royalty increases to 8%, and at $1,200 per ounce, the royalty increases to 9%. The highest royalty fee rate is reached at 10% when gold is $1,300 per ounce and above. The graduated royalty became effective as of January 1, 2011 for all mining projects in Mongolia. On January 19, 2011, the Standing Committee of the State Great Hural of Mongolia issued a resolution to the Mongolian Government which, among other things, resolved to direct the Government to enter into negotiations to have the graduated royalty structure apply to business entities that have already entered into a stability agreement and/or an investment agreement. This would include the Company’s Boroo project which is currently operating pursuant to a stability agreement entered with the Mongolian Government. The Company is of the opinion that the Boroo stability agreement provides, among other things, legislative stabilization for its Boroo operations and accordingly the graduated royalty fee is not applicable to Boroo’s remaining operations. As of the date of this news release, the Company is not aware of any response or activity by the Mongolian Government on this State Great Hural of Mongolia resolution. Despite this, the Company cannot provide any assurances that Boroo will not be made subject to the graduated royalty fee. If the graduated royalty fee does apply to Boroo, it may have an adverse impact on Centerra’s future cash flows, earnings, results of operations or financial condition. Regardless of whether the graduated royalty fee applies to the Boroo operations, it will apply to gold produced from the Gatsuurt project, when developed.
The Boroo stability agreement expires in July 2013, after which time Boroo’s operations will be subject to prevailing tax and royalty fees.
Corporate Matters
In April 2011, Centerra declared a special dividend of C$0.30 per share and an annual dividend of C$0.10 per share, payable on May 18, 2011 to shareholders of record on May 12, 2011. This was the Company’s first special dividend.
In March 2011, Centerra was served by a Turkish company, Sistem Muhenkislik Insaat Sanayi Ticaret SA (“Sistem”), with a notice of enforcement to seize any shares and dividends in Centerra held in the name of the Kyrgyz Republic, followed by a notice of garnishment in April 2011 for any debts owed by Centerra to the Kyrgyz Republic (the “Republic”). These notices were served by Sistem through the Sheriff in Toronto as part of the enforcement proceedings brought by Sistem in the Ontario Superior Court to collect approximately US$11 million with additional interest, owed to Sistem by the Republic in accordance with a judgment of the Ontario Superior Court enforcing an international arbitration award against the Republic. In these Ontario proceedings, Sistem alleges that the shares in Centerra owned by Kyrgyzaltyn JSC, and any dividends paid in respect of those shares, are in fact legally and beneficially owned by the Republic and are therefore subject to