Centerra Gold Reports 2017 First Quarter Net Earnings of $57 Million
NEWS RELEASE Centerra Gold Reports 2017 First Quarter Net Earnings of $57 Million
This news release contains forward-looking information that is subject to the risk factors and assumptions set out under “Caution Regarding Forward-looking Information. It should be read in conjunction with the Company’s unaudited interim condensed consolidated financial statements and the notes thereto for the three- month period ended March 31, 2017. The consolidated financial statements of Centerra are prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. All figures are in United States dollars unless otherwise stated.
All references in this document denoted with NG, indicate a non-GAAP term which is discussed under “Non-GAAP Measures”.
Toronto, Canada, May 1, 2017: Centerra Gold Inc. (TSX: CG) today reported net earnings of $57.0 million or $0.20 per common share (basic) on revenues of $285.3 million in the first quarter of 2017, compared to net earnings of $18.1 million or $0.08 per common share (basic) on revenues of $73.2 million for the same period in 2016.
2017 First Quarter Highlights
- Produced a total of 172,644 ounces of gold, including 127,400 ounces at Kumtor (an increase of 47% from the same period of 2016) and 45,244 ounces at Mount Milligan.
- Sold a total of 187,914 ounces of gold in the quarter, including 134,682 ounces at Kumtor and 53,232 ounces at Mount Milligan.
- Mount Milligan produced 12.6 million pounds of copper during the period and sold 13.6 million pounds of copper.
- Company-wide all-in sustaining costs on a by-product basis per ounce soldNG for the first quarter were $756, excluding revenue-based tax in the Kyrgyz Republic and income tax.
- Cash provided by operating activities before changes in working capitalNG of $118 million.
- Cash generated from operations totaled $72.4 million.
- Cash, cash equivalents and short-term investments at March 31, 2017 was $357.8 million (including $273.9 million of restricted cash and investments at Kumtor).
- On track to achieve 2017 production and cost guidance
Commentary
Scott Perry CEO of Centerra Gold stated, “While the Company had a good quarter operationally and financially, it was over shadowed by a tragic event which occurred in April at Kumtor when an employee was fatally injured while inspecting a light vehicle in the field. This tragedy reinforces our commitment to our Company-wide safety leadership program “Work Safe, Home Safe” which we continue to roll out to all our sites.
On the operational front, the Company produced 172,644 ounces of gold and 12.6 million pounds of copper in the quarter at a strong all-in sustaining cost on a by-product basis of $756 per ounce soldNG, reflecting Mount Milligan achieving all-in sustaining costs on a by-product basis of $530 per ounce soldNG which are in the lower quartile of costs in the industry. Financially, both operations generated a 1 University Avenue, Suite 1500 1 significant amount of cash from operations before working capital changesNG during the quarter, Mount Milligan generated $32 million and Kumtor generated $102.4 million.
Over the quarter we continued to see incremental improvements on a monthly basis at Mount Milligan in both increased mill throughput and recoveries. During this period, the Company also formed an Operational Review Team to identify business process improvements opportunities at all our sites. An initial review at Kumtor and Mount Milligan identified several meaningful projects with short-to-medium term financial and operational benefits. Subsequently we mobilized subject matter experts to further evaluate and commence executing on some of these projects.
The Company continues to advance its discussions with the Government of the Kyrgyz Republic to resolve all outstanding issues affecting the Kumtor Project in a manner that will be fair to all of its stakeholders.”
Exploration Update
Exploration expenditures in the first quarter of 2017 totaled $1.7 million compared to $2.0 million in the same quarter of 2016. Exploration activities during the quarter included trenching, geological mapping, soil/chip and channel sampling, and geophysics at the Company’s various projects.
Mexico Glor Project
A deep trenching program was completed at the Glor Project in Sonora, Mexico, a joint venture with Riverside Resources Inc. with just over 3,000 metres excavated and sampled. Trenching results are encouraging and indicate that the Pitaya prospect, of the Glor Project, may represent a potential bulk minable target.
As a result of the positive trenching results, 2,000 metres of diamond drilling is planned for the second quarter of 2017 with seven or eight drill holes.
Other Projects
Centerra continues to advance other exploration projects in Turkey, Armenia, Canada, Mexico, Nicaragua and Sweden. During the period, exploration drill permits were received for the Öksüt and Yamaç projects in Turkey.
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This Management Discussion and Analysis (“MD&A”) has been prepared as of May 1, 2017, and is intended to provide a review of the financial position and results of operations of Centerra Gold Inc. (“Centerra” or the “Company”) for the three months ended March 31, 2017 in comparison with the corresponding period ended March 31, 2016. This discussion should be read in conjunction with the Company’s unaudited condensed consolidated interim financial statements and the notes thereto for the three months ended March 31, 2017. This MD&A should also be read in conjunction with the Company’s audited annual consolidated financial statements for the years ended December 31, 2016 and 2015, the related MD&A and the Annual Information Form for the year ended December 31, 2016 (the “2016 Annual Information Form”). The Company’s unaudited condensed consolidated interim financial statements and the notes thereto for the three months ended March 31, 2017, 2016 Annual Report and 2016 Annual Information Form are available at www.centerragold.com and on the System for Electronic Document Analysis and Retrieval (“SEDAR”) at www.sedar.com.
1. Overview
Centerra is a gold mining company focused on operating, developing, exploring and acquiring gold properties in North America, Asia, and other markets worldwide. Centerra is a leading Canadian-based gold producer and is one of the largest Western-based gold producers in Central Asia. Centerra’s principal operations are the Kumtor Project located in the Kyrgyz Republic and the Mount Milligan Mine located in British Columbia, Canada.
The Company’s significant wholly-owned subsidiaries include Kumtor Gold Company (“KGC” or “Kumtor”) in the Kyrgyz Republic, Thompson Creek Metals Company Inc. (“Thompson Creek”) in Canada, Langeloth Metallurgical Company LLC (“Langeloth”) and Thompson Creek Mining Co. in the United States of America (USA), Öksüt Madencilik Sanayi vi TicaretA.S. (“OMAS”) in Turkey and Boroo Gold LLC and Centerra Gold Mongolia LLC (“CGM”) in Mongolia. Additionally, the Company holds, through Thompson Creek, a 75% joint venture interest in the Endako Mine in British Columbia, Canada. It also owns a 50% partnership interest in Greenstone Gold Mines LP (the“Greenstone Partnership”) which owns the Greenstone Gold development property including the Hardrock deposit, located in Ontario, Canada. See “Operating Mines and Projects”, “Development Projects” and “Other Corporate Developments” for further details.
The Company has also entered into agreements to earn an interest in joint venture exploration properties located in Portugal, Canada, Mexico, Sweden and Nicaragua.
Centerra’s shares trade on the Toronto Stock Exchange (TSX) under the symbol CG. The Company is headquartered in Toronto, Ontario, Canada.
2. Market Conditions Gold Price
During the first quarter of 2017, the gold price fluctuated between a low of $1,151 per ounce and a high of $1,257 per ounce. The average gold price for the quarter was $1,219 per ounce, a $36 per ounce increase compared to the first quarter of 2016 average of $1,183 per ounce, and a $1 per ounce decrease compared to the fourth quarter of 2016 average.
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Over the course of 2016, gold prices increased with improved investor demand off the back of political uncertainty and continued expectations that U.S. benchmark interest rates would remain at relatively low levels. However, following the U.S. election in the fourth quarter of 2016, gold prices came under pressure as market participants quickly discounted the uncertainty that was previously assumed with a Trump Administration. Subsequently, the first quarter of 2017 saw a reversal of this latter trend as the new U.S. Administration ran into early challenges.
Copper Price
During the first quarter of 2017, the copper price fluctuated between a low of $2.49 per pound and a high of $2.76 per pound. The average copper price for the quarter was $2.65 per pound, a $0.53 per pound increase compared to the first quarter of 2016 average of $2.12 per pound, and a $0.28 per pound increase compared to the fourth quarter of 2016.
After reaching a six year low of $1.94 per pound in the first quarter of 2016, copper prices stabilized and witnessed a significant increase in the fourth quarter of 2016 as a result of mine labour disruptions along with improved investor sentiment as a result of expectations on infrastructure spending with the new U.S. Administration.
Foreign Exchange Rates USD to CAD
The average U.S. dollar exchange rate weakened by 3.5% at the end of the first quarter of 2017 compared to the first quarter of 2016, ranging from 1.25 to 1.46 with an average of 1.33. The relative weakness of the U.S. dollar over the course of 2016 was largely due to a recovery in oil prices from the first quarter of 2016 price of approximately $30 per barrel. While the U.S. dollar was relatively stable versus the Canadian dollar over the first quarter of 2017, late in the period, the U.S dollar began to show signs of more consistent appreciation as a result of a March 2017 U.S. rate hike, cautious rhetoric from the Bank of Canada, and rising trade concerns resulting from a looming North American Free Trade Agreement (NAFTA) renegotiation and domestic fears regarding the possible introduction of a border adjustment tax from the new U.S. Administration.
USD to Kyrgyz Som
The average U.S. dollar exchange rate weakened by 6.5% at the end of the first quarter of 2017 compared to the first quarter of 2016, ranging from 67.02 to 75.90 with an average of 70.50. The Kyrgyz som is being pulled up by strengthening currencies with the country’s main trading partners – mainly Russia. The strengthening in the Russian ruble reflects higher oil prices and an improving economic situation.
Foreign Exchange Transactions
The Company receives its revenues through the sale of gold, copper and molybdenum in U.S. dollars. The Company has operations in the Kyrgyz Republic, Turkey, Mongolia, and Canada (where the Mount Milligan Mine and its corporate head office are also located). During the first three months of 2017, the Company incurred combined expenditures (including capital) totalling approximately $262 million. Approximately $147 million of this (56%) was in currencies other than the U.S. dollar. The percentage of Centerra’s non-U.S. dollar costs, by currency was, on average, as follows: 53% in Canadian dollars, 39% in Kyrgyz soms, 5% in Euros, and 3% in Turkish lira, Mongolian tugriks and British pounds. The average value of the Turkish lira depreciated against the U.S. dollar by approximately 5% from its value at December 31, 2016. The Australian dollar, Russian ruble, Canadian dollar and Euro appreciated against the U.S. dollar by approximately 5%, 5%, 2% and 1% respectively from their value at December 31, 2016. The net impact of these movements in the first quarter of 2017, after taking into
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account currencies held at the beginning of the year, was to increase annual costs by $1.2 million (increase of $1.3 million in the first three months of 2016).
3. Consolidated Highlights Summary
| ($ millions, except as noted) | Three m onths ende d March 31, | ||||
|---|---|---|---|---|---|
| Financial Highlights | 2017 | 2016 (6) | % C hange | ||
| Revenue | $ | 285.3 | $ | 73.2 | 290% |
| Cost of sales | 171.9 | 31.5 | 447% | ||
| Earnings from mine operations | 107.9 | 38.5 | 180% | ||
| Earnings from operations | 65.5 | 18.5 | 254% | ||
| Net earnings | $ | 57.0 | $ | 18.1 | 215% |
| Cash provided by operations | 72.5 | 9.4 | 671% | ||
| Cash provided by operations before changes in working capital (3) | 118.1 | 27.2 | 334% | ||
| Capital expenditures (sustaining) (3) | 19.8 | 23.2 | (15%) | ||
| Capital expenditures (growth) (3) | 1.4 | 5.1 | (73%) | ||
| Capital expenditures (stripping) | 62.5 | 14.1 | 344% | ||
| T otal assets | $ | 2,685.2 | $ | 1,674.2 | 60% |
| Long-term debt and long-term lease obligation | 380.0 | - | 100% | ||
| Cash, short-term investments and restricted cash | 357.8 | 515.0 | (31%) | ||
| Share Data | |||||
| Earnings per common share - $ basic (2) | $ | 0.20 | $ | 0.08 | 150% |
| Earnings per common share - $ diluted (2) | $ | 0.20 | $ | 0.07 | 186% |
| Pe r O unce Data (except as noted) | |||||
| Average gold spot price - $/oz(3) | 1,219 | 1,183 | 3% | ||
| Average copper spot price - $/lbs(3) | 2.65 | 2.12 | 25% | ||
| Average realized gold price - Kumtor (third party) - $/oz(3) | 1,219 | 1,186 | 3% | ||
| Average realized gold price (combined) - $/oz(3) | 1,172 | 1,186 | (1%) | ||
| O perating Highlights | |||||
| Gold produced – ounces poured | 172,644 | 86,444 | 100% | ||
| Gold sold – ounces sold | 187,914 | 61,744 | 204% | ||
| Payable Copper Produced (000's lbs) | 12,595 | - | 100% | ||
| Copper Sales (000's payable lbs) | 13,612 | - | 100% | ||
| Operating costs (on a sales basis) | 151.7 | 19.1 | 696% | ||
| Unit C osts | |||||
| Adjusted ope rating costs - $/oz sold(3)(4) | $ | 340 | $ | 372.31 | (9%) |
| Gold - All-in sustaining costs on a by-product basis – $/oz sold(3)(4) | $ | 756 | $ | 1,015 | (25%) |
| Gold - All-in sustaining costs on a by-product basis (including taxes) – $/oz sold(3) | $ | 885 | $ | 1,187 | (25%) |
| Gold - All-in sustaining costs on a co-product basis (including taxes) – $/oz sold(3)(4) | $ | 795 | $ | - | - |
| C oppe r - All-in sustaining costs on a co-product basis (including taxes) – $/pound sold(3)(4) | $ | 1.86 | $ | - | - |
(1) As at March 31, 2017, the Company had 291,278,437 common shares issued and outstanding (291,280,283 common shares as of May 1, 2017). As of May 1, 2017, Centerra had 5,280,976 share options outstanding under its share option plan with exercise prices ranging from Cdn$3.82 per share to US$59.51 per share, with expiry dates between 2017 and 2024.
(2) Average for the period as reported by the London Bullion Market Association (US dollar Gold P.M. Fix Rate) and London Metal Exchange (LME).
(3) Adjusted operating costs, all-in sustaining costs on a by-product basis (excluding and including taxes) per ounce sold, cash provided by operation before changes in working capital, as well as average realized gold price per ounce and average realized copper price per pound are non-GAAP measures and are discussed under “Non-GAAP Measures”.
(4) Excludes Molybdenum business.
(5) No comparative results for Thompson Creek operations have been presented.
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4. Overview of Consolidated Results
First Quarter 2017 compared to First Quarter 2016
The Company recorded net earnings of $57.0 million in the first quarter of 2017, compared to net earnings of $18.1 million in the comparative quarter of 2016, reflecting higher gold ounces sold at Kumtor, the addition of the Mount Milligan operations, higher average realized gold pricesNG and lower operating costs, partially offset by higher share-based compensation charges.
Production:
Gold production for the first quarter of 2017 totalled 172,644 ounces. Gold production at Kumtor was 127,400 ounces in the first quarter of 2017, 47% higher than the 86,444 ounces produced in the comparative quarter of 2016. The increase in ounces poured at Kumtor is a result of milling higher grade ore from stockpiles, compared to the lower grade ore mined and processed from the initial benches in cutback 17 during the comparative period. During the quarter, Mount Milligan produced 45,244 ounces of gold and 12.6 million pounds of copper
Safety and Environment:
Centerra had one reportable injury in the first quarter of 2017, consisting of a lost time injury to a contractor employee at Kumtor. Subsequent to the quarter-end, on April 11, 2017, an employee suffered fatal injuries at the Kumtor mine. The Company is cooperating with relevant Kyrgyz Republic officials who are investigating this incident.
There were no reportable releases to the environment during the first quarter of 2017.
Financial Performance:
The increase in revenue for the first quarter of 2017 resulted from more gold ounces sold (187,914 ounces compared to 61,744 ounces in the first quarter of 2016), partially offset by a 1% lower combined average realized gold price NG during the quarter ($1,172 per ounce compared to $1,186 per ounce in the same quarter of 2016). The increase in gold ounces sold at Kumtor (134,681 ounces compared to 61,744 ounces in the same quarter of 2016) is partly due to delays experienced in shipments to Kyrgyzaltyn JSC (“Kyrgyzaltyn”) in the first quarter of 2016 while Kyrgyzaltyn held contractual discussions with its offtake bank: Kumtor ended the first quarter of 2016 with approximately 33,165 ounces of gold doré on hand, which was subsequently sold in the second quarter of 2016. Mount Milligan sold 53,232 ounces of gold and 13.6 million pounds of copper during the first quarter of 2017 which contributed $84.7 million in revenues. The molybdenum business contributed $36.5 million in revenues during the first quarter of 2017.
The increase in cost of sales in the first quarter of 2017 ($171.9 million compared to $31.5 million in the first quarter of 2016) resulted mainly from the significant increase in ounces sold from the Kumtor mine and also reflects the addition of Mount Milligan (gold and copper sales) and the molybdenum business . Depreciation, depletion and amortization (“DD&A”) associated with production was $54.3 million in the first quarter of 2017 as compared to $12.4 million in the same period of 2016, mainly as a result of higher sales.
Operating Costs:
Operating costs (on a sales basis) increased to $151.7 million in the first quarter of 2017 compared to $19.1 million in the same period of 2016, reflecting greater ounces sold at Kumtor and lower operating costs for diesel and consumables at Kumtor, partially offset by labour cost increases plus the addition of 1 University Avenue, Suite 1500 6 Mount Milligan and molybdenum business costs. Operating costs in the first quarter of 2016 were also reduced by the partial reversal of an inventory impairment recorded at the end of 2015.
The Kumtor operation continues to benefit from current favourable diesel prices and lower consumption during the quarter and the Kyrgyz som has also continued to trade at historical lows at 72 soms per 1 USD. The benefit of lower diesel prices, lower consumption and favourable rate of the Kyrgyz som to Kumtor is significant as diesel and the impact of costs paid in soms account for approximately 17% and 25% of total operating costs at Kumtor, respectively.
Centerra’s all-in sustaining costs on a by-product basis per ounce of gold soldNG, which excludes revenuebased tax and income tax, for the first quarter of 2017 decreased to $756 from $1,015 in the comparative period mainly as a result of more ounces sold at Kumtor ($110 per ounce), lower sustaining capitalNG spending ($59 per ounce) and the positive impact from the addition of Mount Milligan ($89 per ounce). This was partially offset by higher spending on capitalized stripping and incremental administration costs, as a result of the Thompson Creek acquisition.
The increased sales volume at Kumtor in the first quarter of 2017 was due primarily to higher production resulting from higher grades of ore processed from the stockpiles as compared to the same period of 2016 (3.53 g/t compared to 2.27 g/t) and slightly better recoveries (76% compared to 75%).
5. Liquidity and Capital Resources
The Company believes its cash on hand and working capital at March 31, 2017, together with future cash flows from operations and cash provided by the Company’s existing credit facilities will be sufficient to fund its anticipated operating cash requirements, although there can be no assurance of this. See “Caution Regarding Forward-Looking Information”.
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Cashflow:
| Three months ended March 31, | |||
|---|---|---|---|
| Unaudited ($ millions, except as noted) | 2017 | 2016 | % Change |
| Cash provided by operations before changes in working capitalNG | 118.0 | 27.2 | 334% |
| - Changes in working capital | (45.6) | (17.8) | (161%) |
| Cash provided by operating activities | 72.4 | 9.4 | 666% |
| Cash used in investing activities: | |||
| - Capital additions (cash) | (69.0) | (35.4) | (94%) |
| - Short-term investment purchased, net | (25.0) | (19.6) | (28%) |
| - other investing items | (10.9) | (3.7) | (195%) |
| Cash used in investing activities | (104.9) | (19.6) | (434%) |
| Cash used in financing activities: | |||
| - Debt repayment | (37.5) | - | (100%) |
| - Dividends declared and paid | - | (7.2) | 100% |
| - Payment of interest and borrowing costs | (8.7) | (3.5) | (143%) |
| Cash used in financing activities | (46.2) | (10.7) | (330%) |
| Decrease in cash and cash equivalents | (78.7) | (20.8) | (278%) |
In the first quarter of 2017, Centerra generated cash provided by operations before working capital changesNG of $118.0 million, compared to $27.2 million in the prior period. At March 31, 2017, the major working capital difference compared to the prior-period was an outstanding concentrate receivable of $30 million at Mount Milligan which was collected in April 2017.
The Company generated $72.4 million in cash from operations in the first quarter of 2017, an increase of $63 million compared to the first quarter of 2016, mainly as a result of higher ounces sold. The increased sales reflect increased production from Kumtor and the contribution of Mount Milligan in the first quarter of 2017 whereas the comparative quarter of 2016 was impacted by the delayed gold shipments to Kyrgyzaltyn in March of that quarter.
Cash used in investing activities increased to $104.9 million in the first quarter of 2017 as compared to $19.6 million the first quarter of 2016, reflecting an increase in capital spending (mainly additional stripping at Kumtor) and an increase in net purchases of short-term investments compared to the same quarter in 2016.
Cash used in financing of $46.2 million in the first quarter of 2017 was $35.5 million higher than the amount spent in the first quarter of 2016, and reflected debt repayments and higher borrowing charges related to the Company’s new credit facilities (discussed below). In February 2017, Centerra repaid $25 million on its Corporate Facility (defined below) with EBRD (defined below) and in March 2017 made its first principal payment of $12.5 million on the Centerra B.C. Facility (defined below).
Cash, cash equivalents, restricted cash and short-term investments at March 31, 2017 decreased to $357.8 million (including $273.9 million of restricted cash and investments at Kumtor) from $408.8 million at December 31, 2016 (including $247.8 million of restricted cash at Kumtor).
The restricted amounts at March 31, 2017 includes $248.8 million of cash and $25.1 million of short-term investments at Centerra’s Kyrgyz Republic operating subsidiary, KGC. KGC is subject to an interim order of the Bishkek Inter-District Court in the Kyrgyz Republic prohibiting KGC from taking any actions relating to certain financial transactions, including transferring property or assets, declaring or paying dividends or making loans to Centerra. The interim order purports to secure KGC’s potential
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liability for a claim brought by SAEPF (defined below) and Centerra has included the dispute in the ongoing international arbitration proceeding against the Kyrgyz Republic (see Other Corporate Developments – Kyrgyz Republic for further details). As at March 31, 2017, the cash and investments balance of KGC increased to $273.9 million (from $247.8 million at December 31, 2016) and is expected to continue to increase over time. As a result of the interim order, the Company continues to be dependent on its unrestricted cash balance and cash generated from the Mount Milligan Mine to meet its obligations when due.
The unrestricted cash and cash equivalents balance at March 31, 2017 of $81.3 million includes $25 million that can only be used for Mongolian purposes and $24.8 million held in Centerra B.C Holdings Inc. (“Centerra B.C Holdings”). The funds held in Centerra B.C. Holdings can only be used for expenditures on Centerra B.C. Holdings’ subsidiaries and assets including the Mount Milligan Mine it indirectly holds through Thompson Creek as required by the Centerra B.C. Facility. The Centerra B.C. Facility also required that distributions, including cash dividends declared by Centerra B.C. Holdings to Centerra, be matched by an early repayment of an equal amount under the Centerra B.C. Facility. The Company plans to commence cash dividends distributions from Centerra B.C. Holdings to Centerra in the second quarter of 2017 as cash balances increase.
Credit Facilities:
Centerra B.C Holdings Credit Facility As part of the acquisition of Thompson Creek which closed on October 20, 2016, Centerra B.C. Holdings, a wholly-owned subsidiary of the Company, secured financing from a lending syndicate in the aggregate amount of $325 million (the “Centerra B.C. Facility”), consisting of a $250 million non-revolving term facility and a $75 million senior secured revolving credit facility). The principal amount of the term portion of the Centerra B.C. Facility is to be repaid in $12.5 million quarterly increments which commenced with the first payment made on March 31, 2017. The revolving portion of the Centerra B.C. Facility is to be repaid at the end of the five-year term.
At March 31, 2017, the credit facilities were fully drawn with $312.5 million outstanding under the Centerra B.C. Facility.
Centerra Corporate Facility On February 12, 2016, the Company entered into a five-year $150 million revolving credit facility (the “Corporate Facility”) with the European Bank for Reconstruction and Development (“EBRD”), whereby $50 million of this facility is for the purpose of funding direct and indirect costs associated by the Gatsuurt Project. In February 2017, the Company repaid $25 million of the $50 million reserved for the Gatsuurt Project. The remaining $25 million must be repaid on February 3, 2018, if a definitive agreement for the Gatsuurt Project is not reached by that time.
At March 31, 2017, the Company had drawn $125 million under the Corporate Facility.
Except as noted above, funds drawn under the Corporate Facility are available to be re-drawn on a semiannual basis and, at the Company’s discretion, repayment of the loaned funds may be extended until 2021.
OMAS Facility On April 5, 2016, OMAS, a wholly-owned subsidiary of the Company, entered into a 5.75-year $150 million credit facility agreement (the “OMAS Facility”). The purpose of the OMAS Facility is to assist in
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financing the construction of the Company’s Öksüt Project. Availability of the OMAS Facility is subject to customary conditions precedent, including receipt of all necessary permits and approvals for the Öksüt Project. The Company is currently awaiting a pastureland permit at the Öksüt Project. If the conditions are not satisfied or waived by the deadline of June 30, 2017, or an additional extension is not granted by the lenders, the commitments under the OMAS Facility will be cancelled. As of March 31, 2017, the OMAS Facility remains undrawn.
Centerra was in compliance with the terms of all of its facilities in the first quarter of 2017.
Capital Expenditures (spent and accrued):
$ millions Three months ended M arch 31,
| 2017 | 2016 | % Change |
| 19.8 | 23.2 | (15%) |
| 62.5 | 14.1 | 343% |
| 1.4 | 5.1 | (73%) |
| 2.1 | 6.7 | (69%) |
| 1.0 | 0.6 | 71% |
| 86.8 | 49.7 | 75% |
Consolidated:
NG Sustaining capital (1)
Capitalized stripping NG Growth capital (2)
Öksüt Project development (3)
Greenstone Gold Property capital
(1) Includes cash component of $46.7 million and $10.4 million in the first quarter of 2017 and 2016, respectively.
(2) Three months ended March 31, 2016 includes $3 million for the purchase of the net smelter royalty from Teck Resources Limited.
(3) In accordance with the Company's accounting policy, the 50% share paid on behalf of Premier Gold Mines Limited in the project is capitalized as part of mineral properties in Property, Plant & Equipment.
Capital expenditures in the first quarter of 2017 totalled $86.8 million compared to $49.7 million in the same period of 2016, resulting mainly from increased spending on capitalized stripping at Kumtor to develop cut-back 18 and the Sarytor pit, partially offset by lower sustaining and growth capitalNG for equipment rebuilds and overhauls, as well as lower infrastructure spending at Kumtor.
6. Financial Instruments
The Company seeks to manage its exposure to fluctuations in commodity prices and foreign exchange rates by entering into derivative financial instruments from time to time.
Fuel Hedges:
In 2016, the Company established a diesel fuel price hedging strategy using derivative instruments to manage the risk associated with changes in diesel fuel prices on the cost of operations at the Kumtor Mine. The Company targets to hedge up to 70% of monthly diesel purchases at Kumtor for the first 12 months and 50% of the 13 through 24 month exposure. The Company hedges its exposure with crude oil futures contracts, as the price of diesel fuel closely correlates to the price of crude oil.
Gold and Copper Derivative Contracts:
The Company must satisfy its obligation under the gold and copper stream arrangement with RGLD Gold AG and Royal Gold Inc. (collectively “Royal Gold”) by delivering refined physical gold or LME copper 1 University Avenue, Suite 1500 10 warrants to Royal Gold after receiving payment from third-party purchasers which purchase concentrate from the Mount Milligan Mine. In order to hedge the metal price risk that arises when physical purchase and concentrate sales pricing periods do not match, the Company has entered into certain forward gold and copper purchases and sales swap contracts pursuant to which it purchases gold or copper at an average price during a quotational period and sells gold or copper at a spot price. These derivative contracts are not designated as hedging instruments.
Copper Hedges:
On January 24, 2017, the Company initiated a hedging program for a portion of its expected 2017 and first quarter 2018 copper production from Mount Milligan. Centerra expects to hedge no more than 75% of its anticipated copper production, net of copper payable under its streaming arrangement.
The positions taken by the Company for each of these programs at as March 31, 2017 are summarized as follows:
| Settlement | As at March 31, 2017 | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| Program | Instrument | Unit | Strike price | Type | 2017 | 2018 | 2019 | Total position | Fair value Gain ('000') |
| Fuel Hedges Copper Hedges (1) Copper Hedges (1) Gold Derivative Contracts Copper Derivative Contracts | Crude oil options Forward contracts Zero‐cost collars Forward contracts Forward contracts | Barrels Pounds Pounds Ounces Pounds | $62.56 ‐ $65.31 $2.68 ‐ $2.70 $2.25 ‐ $3.21 ND ND | Fixed Fixed Fixed Floating Floating | 283,000 21 million 8 million 18,240 2 million | 283,000 1 million 2 million ‐ ‐ | 51,000 ‐ ‐ ‐ ‐ | 617,000 22 million 10 million 18,240 2 million | $ 900 $ 1,041 $ 859 $ ‐ |
(1) Represents approximately 62% of Mount Milligan’s expected 2017 copper production, net of copper streaming arrangement with Royal Gold.
ND = strategic hedging program with floating terms, for which settlement prices are not defined as at March 31, 2017
Subsequent to the end of first quarter 2017:
In April 2017, the Company entered into a series of zero-cost collars covering approximately 19,000 ounces of Mount Milligan gold production with settlements occurring monthly from May through to December 2017. The minimum price is set at $1,225 per ounce and an average maximum price is $1,371 per ounce. Under the zero-cost collar, the Company can put the number of ounces to the counterparty at the minimum price, if the price were to fall below the minimum, and the counterparty has the option to require the Company to sell to it the number of ounces at the maximum price, if the price were to rise above the maximum.
Centerra does not enter into off-balance sheet arrangements with special purpose entities in the normal course of its business, nor does it have any unconsolidated affiliates.
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7. Operating Mines and Facilities Kumtor Mine
The Kumtor open pit mine, located in the Kyrgyz Republic, is one of the largest gold mines in Central Asia operated by a Western-based gold producer. It has been in production since 1997 and has produced over 11.1 million ounces of gold to March 31, 2017.
Recent Developments:
On April 19, 2017, the Company reported that the Kumtor operation received its 2017 maximum allowable discharge (MAD) permit which allows for discharge of treated effluent from its tailings management facility starting in the spring. Kumtor now has all the necessary permits and approvals in place for continuous operations throughout 2017.
On April 11, 2017, an accident at the Kumtor mine resulted in an employee fatality. Investigations both internally and by the relevant Kyrgyz authorities have commenced.
- On March 6, 2017, the Kumtor operation received the necessary permits to raise the tailings dam for its tailings management facility, which will provide adequate tailings storage capacity for Kumtor’s mill tailings deposition from 2021 through the end of 2024.
- On December 28, 2016, the Company received its 2017 maximum allowable emissions permit and its waste disposal permit, and the Kyrgyz authorities approved the 2017 mine plan for its Kumtor Project which includes the Sarytor area.
- The Kumtor Project continues to be subject to a number of claims made by, among others, Kyrgyz Republic state environmental agencies which the Company continues to dispute. The Company continues its discussions with the Government of the Kyrgyz Republic to resolve all outstanding issues affecting the Kumtor Project in a manner that will be fair to all of its stakeholders. See “Other Corporate Developments – Kyrgyz Republic” for further details.
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