Centerra Gold Favourably Revises 2017 Guidance and Reports Net Earnings of $23 Million for the Second Quarter 2017
NEWS RELEASE
Centerra Gold Favourably Revises 2017 Guidance and Reports Net Earnings of $23 Million for the Second Quarter 2017
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 and six month period ended June 30, 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, July 31, 2017: Centerra Gold Inc. (TSX: CG) today reported net earnings of $23.4 million or $0.08 per common share (basic) on revenues of $279.2 million in the second quarter of 2017, compared to net earnings of $2.9 million or $0.01 per common share (basic) on revenues of $160.4 million for the same period in 2016. In the second quarter of 2017, the Company adjusted its Mongolian assets carrying value and recorded a pre-tax asset impairment of $41.3 million or $0.14 per common share (basic).
The Company’s results include Thompson Creek operations for the three and six months ended June 30, 2017. Comparative results for the same periods in 2016 do not include Thompson Creek operations, as the Company closed the acquisition of Thompson Creek Metals Inc. on October 20, 2016.
2017 Second Quarter Highlights
- Produced a total of 195,719 ounces of gold, including 138,623 ounces at Kumtor (an increase of 42% from the same period of 2016) and 57,096 ounces at Mount Milligan.
- Sold a total of 188,225 ounces of gold in the quarter, including 135,235 ounces at Kumtor and 52,990 ounces at Mount Milligan.
- Mount Milligan produced 15.1 million pounds of copper during the period and sold 14.4 million pounds of copper.
- Reduced carrying value of the Mongolian assets by $41.3 million (pre-tax).
- Company-wide all-in sustaining costs on a by-product basis per ounce soldNG for the second quarter were $742, excluding revenue-based tax in the Kyrgyz Republic and income tax.
- Cash provided by operating activities before changes in working capitalNG of $121.9 million (including $102.6 million from Kumtor and $29.9 million from Mount Milligan).
- Cash generated from operations totaled $142.8 million.
- Cash, cash equivalents and short-term investments at June 30, 2017 was $401.4 million (including $299.2 million of restricted cash and investments at Kumtor).
- Favourably revised gold production guidance at Kumtor to 525,000 to 555,000 ounces and company-wide gold production guidance to 785,000 to 845,000 ounces.
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- Lowered all-in sustaining costNG guidance for Kumtor to $751 to $795 per ounce sold and company-wide all-in sustaining costs on a by-product basis per ounce soldNG guidance to $693 to $747.
Commentary
Scott Perry, CEO of Centerra Gold stated, “During the second quarter we continued to deploy our Company-wide safety leadership program “Work Safe, Home Safe” to all our sites, but as we reported on in the first quarter report this was over shadowed by a fatality in early April at Kumtor.”
“On the operational front, we had an excellent quarter producing 195,719 ounces of gold and 15.1 million pounds of copper at a leading all-in sustaining cost on a by-product basis of $742 per ounce soldNG, reflecting Mount Milligan achieving all-in sustaining costs on a by-product basis per ounce soldNG of $473. At Mount Milligan over the quarter we are seeing the results of our continuous improvement program as the mine achieved increased grades, recoveries and mill throughput with the mill achieving an average daily throughput of 55,600 tonnes in June.”
“Financially, both operations generated a significant amount of cash from operations before working capital changesNG during the quarter, Mount Milligan generated $29.9 million and Kumtor generated $102.6 million.”
“With our second quarter earnings release today, the Company increased its gold production guidance for Kumtor for the year to 525,000 – 555,000 ounces and Company-wide gold production to 785,000 to 845,000 ounces. We also lowered our expected all-in sustaining costNG guidance at Kumtor to $751 to $795 per ounce sold and Company-wide all-in sustaining costs on a by-product basis per ounce soldNG guidance to $693 to $747. We are well positioned to achieve our revised gold production and cost guidance for the year, ranking the Company in the bottom quartile on the global gold producers All-In Sustaining Cost curve.”
“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 activities during the quarter included drilling, trenching, geological mapping, soil/chip and channel sampling, and geophysics at the Company’s various projects. Expenditures for second quarter of 2017 totalled $2.4 million compared to the second quarter of 2016 of $3.1 million ($4.2 million in the first half of 2017 compared to $5.1 million in the comparative period of 2016).
Turkey Öksüt Gold Project
Drilling activities have restarted at Öksüt with eight drill holes completed for 970 metres. Results were received for two holes testing the step-out from Keltepe NW and for two holes from the Güneytepe infill. Assays from the first two holes were disappointing with no significant intercepts. The infill holes were positive with better intervals being:
ODD0279 40.7 metres @ 0.44 g/t gold (“Au”) from 36.0 metres to 76.7 metres
ODD0280 107.5 metres @ 0.74g/t Au from 19.0 metres to 126.5 metres including 26.7 metres @ 1.72 g/t Au from 25.0 metres to 51.7 metres
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Objectives for the 3,000 metre drill program are to upgrade the resources at Keltepe and Güneytepe, as well as to confirm oxide mineralization at Keltepe NW, Yelibelen and Büyüktepe.
The above mineralized intercepts were calculated using a cut-off grade of 0.2 g/t Au and a maximum internal dilution interval of 5.0 metres. Drill collar locations and associated graphics are available at the following link: http://media3.marketwire.com/docs/CGQ22017LOC.pdf
A listing of the drill results, drill hole locations and plan map for the Öksüt Project have been filed on the System for Electronic Document Analysis and Retrieval (‘SEDAR’) at www.sedar.com and are available at the Company’s web site www.centerragold.com.
Mexico Glor Project
Nine drill holes have been completed at the Pitaya Target for a total of 1,942 metres. Results from this program are mixed with only narrow anomalous gold intervals identified, but these have added to the understanding of the controls on the gold mineralization.
Additional field work is warranted with the goal of identifying drill targets for a second round of drilling prior to the end of the year.
Other Projects
During the quarter, exploration drill permits have been received for the Yamaç Project in Turkey, Klippen Project in Sweden and the Kapuyt Project in Armenia. Drilling activities are expected to start at these properties in the third quarter.
Centerra continues to advance various exploration projects in Turkey, Armenia, Mexico, Nicaragua and Sweden.
Qualified Person & QA/QC - Exploration
Exploration information and other related scientific and technical information in this news release regarding the Öksüt Project were prepared in accordance with the standards of the Canadian Institute of Mining, Metallurgy and Petroleum and National Instrument 43-101 (NI 43-101) and were prepared, reviewed, verified and compiled by Mustafa Cihan, Member of the Australian Institute of Geoscientists (AIG), Exploration Manager at Centerra’s Turkish subsidiary Öksüt Madencilik A.Ş., who is the qualified person for the purpose of NI 43-101. Sample preparation, analytical techniques, laboratories used and quality assurance-quality control protocols used during the exploration drilling programs are done consistent with industry standards and independent certified assay labs are used.
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This Management Discussion and Analysis (“MD&A”) has been prepared as of July 31, 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 and six months ended June 30, 2017 in comparison with the corresponding period ended June 30, 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 and six months ended June 30, 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 and six months ended June 30, 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. 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”.
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 Facilities”, “Development Projects” and “Other Corporate Developments” for further details.
The Company has also entered into agreements to earn interests in joint venture exploration properties located in 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 second quarter of 2017, the gold price fluctuated between a low of $1,220 per ounce and a high of $1,294 per ounce. The average gold price for the second quarter of $1,257 per ounce, was comparable to the second quarter of 2016 average of $1,259 per ounce, and a $38 per ounce increase compared to the first quarter of 2017 average.
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Over the course of the second quarter of 2017, geopolitical uncertainty saw increased investor demand for gold placing upward pressure on spot prices. However, gold remained below $1,300 per ounce as market participants prepared for the second rate hike by the US Federal Reserve in June 2017, along with the potential for additional monetary tightening in the second half of the year.
Copper Price
The average copper price for the quarter was $2.57 per pound, a $0.42 per pound increase compared to the second quarter of 2016 average of $2.15 per pound, and a $0.08 per pound decrease compared to the first quarter of 2017.
Early in the second quarter of 2017, copper prices retreated, but recovered into the end of the quarter with renewed optimism on Chinese demand, the world’s largest consumer of the metal.
Foreign Exchange Rates USD to CAD
The average U.S. dollar exchange rate for the second quarter of 2017 strengthened by 4% when compared to the average of the second quarter of 2016 (1.29), with rates in the second quarter of 2017 ranging from 1.30 to 1.37 and averaging 1.34. 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. The first half of the second quarter of 2017 saw the appreciation of the U.S. dollar, with uncertainty in Canada around U.S. government policy (specifically trade concerns resulting from North American Free Trade Agreement (“NAFTA”) renegotiations and fears regarding the possible introduction of a border adjustment tax) and cautious language from the Bank of Canada. The exchange rate reached a 14-month high of 1.38 in the month of May. Indications from the Bank of Canada in the second half of the quarter led many to believe an interest rate hike in Canada was imminent, causing the Canadian dollar to strengthen and close the quarter at 1.30. The Bank of Canada announced an interest rate hike on July 12, 2017, further strengthening the Canadian dollar.
USD to Kyrgyz Som
The average U.S. dollar exchange rate for the second quarter of 2017 was consistent with the average of the second quarter of 2016 (68.4), with rates in the second quarter of 2017 ranging from 67.1 to 69.1 and averaging 68.1. The Kyrgyz som continues to be pulled up by the strengthening of currencies of the Kyrgyz Republic’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, United States of America and Canada (where the Mount Milligan Mine and its corporate head office are also located). During the first six months of 2017, the Company incurred combined expenditures (including capital) totalling approximately $568 million. Approximately $285 million of this (50%) 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: 50% in Canadian dollars, 41% in Kyrgyz soms, 6% 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 3% from its value at December 31, 2016. The Euro, Mongolian tugrik, British pound, Kyrgyz som and Canadian dollar appreciated against the U.S. dollar by approximately 3%, 2%, 2%, 1% and 1%, respectively, from their value at December 31, 2016. The net impact of these movements in the six months ended June 30 2017, after taking into account currencies
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held at the beginning of the year, was to increase annual costs by $2.7 million (increase of $7.7 million in the six months ended June 30 2016).
3. Consolidated Highlights Summary
| ($ millions, except as noted) | Three months ended June 30, | Six months ended June 30, | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Financial Highlights | 2017 | 2016 (5) | % Change | 2017 | 2016 (5) | % Change | ||||
| Revenue | $ | 279.2 | 160.4 | 74% | $ | 564.5 | 233.3 | 142% | ||
| Cost of sales | 165.2 | 116.8 | 41% | 337.1 | 147.9 | 128% | ||||
| Earnings from mine operations | 108.5 | 40.5 | 168% | 216.4 | 79.1 | 174% | ||||
| Asset Impairment | 41.3 | - | 100% | 41.3 | - | 100% | ||||
| Earnings from operations | 24.2 | 1.3 | 1801% | 89.7 | 19.8 | 354% | ||||
| Net earnings | $ | 23.4 | $ | 2.9 | 715% | $ | 80.4 | $ | 21.0 | 282% |
| Cash provided by operations | 142.8 | 57.2 | 150% | 211.1 | 66.7 | 216% | ||||
| Cash provided by operations before changes in working capital (3) | 121.9 | 59.2 | 106% | 244.7 | 86.4 | 183% | ||||
| Capital expenditures (sustaining) (3) | 18.9 | 13.7 | 38% | 38.5 | 36.9 | 4% | ||||
| Capital expenditures (growth) (3) | 9.8 | 14.4 | (32%) | 14.3 | 24.0 | (40%) | ||||
| Capital expenditures (stripping) | 64.3 | 25.6 | 151% | 128.9 | 39.7 | 225% | ||||
| Total assets | $ | 2,667.4 | 1,711.8 | 56% | $ | 2,667.4 | 1,711.8 | 56% | ||
| Long-term debt and long-term lease obligation | 358.1 | - | 100% | 358.1 | - | 100% | ||||
| Cash, short-term investments and restricted cash | 401.4 | 542.9 | (26%) | 401.4 | 542.9 | (26%) | ||||
| Share Data | ||||||||||
| Earnings per common share - $ basic (1) | $ | 0.08 | 0.01 | 700% | $ | 0.28 | 0.09 | 211% | ||
| Earnings per common share - $ diluted (1) | $ | 0.08 | - | 100% | $ | 0.27 | 0.08 | 238% | ||
| Per Ounce Data (except as noted) | ||||||||||
| Average gold spot price - $/oz(2) | 1,257 | 1,260 | 0% | 1,238 | 1,223 | 1% | ||||
| Average copper spot price - $/lbs(2) | 2.57 | - | 100% | 2.61 | - | 100% | ||||
| Average realized gold price - Kumtor (third party) - $/oz(3) | 1,247 | 1,264 | (1%) | 1,233 | 1,238 | 0% | ||||
| Average realized gold price (combined) - $/oz(3) | 1,165 | 1,264 | (8%) | 1,169 | 1,238 | (6%) | ||||
| Operating Highlights | ||||||||||
| Gold produced – ounces poured | 195,719 | 97,724 | 100% | 368,364 | 185,316 | 99% | ||||
| Gold sold – ounces sold | 188,225 | 127,909 | 47% | 376,139 | 189,653 | 98% | ||||
| Payable Copper Produced (000's lbs) | 15,062 | - | 100% | 27,658 | - | 100% | ||||
| Copper Sales (000's payable lbs) | 14,358 | - | 100% | 27,970 | - | 100% | ||||
| Operating costs (on a sales basis) (3) | 84.1 | 60.4 | 39% | 170.0 | 79.1 | 115% | ||||
| Unit Costs | ||||||||||
| Adjusted operating costs - $/oz sold(3)(4) | $ | 337 | $ | 512 | (34%) | $ | 339 | $ | 467 | (27%) |
| Gold - All-in sustaining costs on a by-product basis – $/oz sold(3)(4) | $ | 742 | $ | 822 | (10%) | $ | 746 | $ | 885 | (16%) |
| Gold - All-in sustaining costs on a by-product basis (including taxes) – $/oz sold(3) (4) | $ | 858 | $ | 1,000 | (14%) | $ | 869 | $ | 1,060 | (18%) |
| Gold - All-in sustaining costs on a co-product basis (including taxes) – $/oz sold(3)(4) | $ | 789 | $ | - | - | $ | 792 | $ | - | - |
| Copper - All-in sustaining costs on a co-product basis (including taxes) – $/pound sold(3)(4) | $ | 1.58 | $ | - | - | $ | 1.68 | $ | - | - |
(1) As at June 30, 2017, the Company had 291,281,206 common shares issued and outstanding (291,283,176 common shares as of July 31, 2017). As of July 31, 2017, Centerra had 5,228,696 share options outstanding under its share option plan with exercise prices ranging from Cdn$3.82 per share to Cdn$42.71 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) Capital expenditures (sustaining and growth), operating costs (on a sales basis), adjusted operating costs per ounce sold, all-in sustaining costs on a by-product or co-product basis (for gold and copper, in each case 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
Second Quarter 2017 compared to Second Quarter 2016
The Company recorded net earnings of $23.4 million in the second quarter of 2017, compared to net earnings of $2.9 million in the comparative quarter of 2016, reflecting an asset impairment in Mongolia, more gold ounces sold at Kumtor and the addition of the Mount Milligan operations, partially offset by lower average realized gold pricesNG.
Production:
Gold production for the second quarter of 2017 totalled 195,719 ounces. Gold production at Kumtor was 138,623 ounces in the second quarter of 2017, 42% higher than the 97,724 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 57,096 ounces of gold and 15.1 million pounds of copper
Safety and Environment:
Centerra had three reportable injuries in the second quarter of 2017, which included a fatal injury of a maintenance employee at Kumtor on April 11, 2017. Investigations involving the Kyrgyz State Inspectorate for Environmental and Technical Safety have been completed and no charges are expected to be filed. There were also two medical aid injuries in the quarter.
There were no reportable releases to the environment during the second quarter of 2017. However, on July 9, 2017, a reportable spill occurred at Kumtor when a diesel fuel truck rolled over a safety berm on the technical road on its way to the mine site. Approximately 8.8 tonnes of diesel leaked and was contained, with no release in any water ways. Clean-up of the affected area was completed on the same day. Kumtor continues to work closely with local authorities to complete the investigation.
Financial Performance:
Revenue increased by 73% to $279.2 million in the second quarter of 2017 as a result of more gold ounces sold (188,225 ounces compared to 127,909 ounces in the second quarter of 2016), partially offset by a 8% lower combined average realized gold price NG during the quarter ($1,165 per ounce compared to $1,264 per ounce in the same quarter of 2016). The increase in gold ounces sold at Kumtor (135,235 ounces compared to 127,909 ounces in the same quarter of 2016) reflects the processing of higher grade ore from stockpiles. In the second quarter of 2016, lower grade ore was mined and processed from the initial benches in cut-back 17. Mount Milligan sold 52,990 ounces of gold and 14.4 million pounds of copper during the second quarter of 2017 which contributed $78.0 million in revenues. The molybdenum business contributed $32.6 million in revenues during the second quarter of 2017.
Cost of sales increased by 40% in the second quarter of 2017 ($165.2 million compared to $116.8 million in the second quarter of 2016) mainly resulting from the significant increase in ounces sold from the Kumtor mine and also reflecting the addition of Mount Milligan (gold and copper sales) and the molybdenum business. Depreciation, depletion and amortization (“DD&A”) associated with production was $50.8 million in the second quarter of 2017 as compared to $56.4 million in the same period of 2016, primarily due to processing the higher grade and lower cost cut-back 17 ore in the second quarter of 2017, compared to the higher cost ore from cut-back 16 and from the initial benches of cut-back 17 that was processed in the comparative period of 2016, partially offset by higher sales and the addition of Mount Milligan and the molybdenum business in the second quarter of 2017.
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The Company reduced the carrying value of its Mongolian assets by $41.3 million (pre-tax) in the second quarter of 2017 to reflect the receipt of preliminary results from the ongoing technical and economic studies related to the Gatsuurt Project (incorporating updated capital and operating costs and the current Mongolian tax and royalty regime) which were initiated in 2016. As a result, the Company has reduced the carrying value of the Mongolian assets to their estimated recoverable value of approximately $60 million. The Company is continuing to work on such studies to optimize the project and its value.
Operating Costs:
Operating costs (on a sales basis) increased to $84.1 million in the second quarter of 2017 compared to $60.4 million in the same period of 2016, reflecting greater ounces sold at Kumtor and lower operating costs for consumables, partially offset by labour cost increases at Kumtor plus the addition of Mount Milligan and molybdenum business costs.
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 second quarter of 2017 decreased to $742 from $822 in the comparative period mainly as a result of more ounces sold at Kumtor ($10 per ounce) and the positive impact from the addition of Mount Milligan ($106 per ounce). This was partially offset by higher capitalized stripping and spending on maintenance and labour at Kumtor and incremental administration costs, as a result of the Thompson Creek acquisition ($36 per ounce).
The increased sales volume at Kumtor in the second quarter of 2017 was due primarily to increased gold 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 2.63 g/t) and better recoveries (79.3% compared to 71.9%).
First Half 2017 compared to First Half 2016
Production:
Gold production for the first half of 2017 totalled 368,364 ounces. Gold production at Kumtor was 266,023 ounces in the first half of 2017, 44% higher than the 184,168 ounces produced in the first half of 2016. The increase in ounces poured at Kumtor is a result of milling higher grade ore from stockpiles (3.53 g/t compared to 2.46 g/t) and realizing higher recoveries (77.6% compared to 73.3%) compared to the same period in 2016. During the first half of 2017, Mount Milligan produced 102,340 ounces of gold and 27.7 million pounds of copper.
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Safety and Environment:
Centerra had four reportable injuries in the first half of 2017, including a fatal injury of a maintenance employee at Kumtor, a lost time injury to a contractor and two medical aid injuries.
There were no reportable releases to the environment during the first half of 2017. However, as noted above, on July 9, 2017, a reportable spill occurred at Kumtor when a diesel fuel truck rolled over a safety berm on the technical road on its way to the mine site.
Financial Performance:
Revenue increased to $564.5 million in the first half of 2017 from $233.3 million, as a result of additional gold ounces sold (376,139 ounces compared to 185,316 ounces in the first half of 2016), partially offset by a 6% lower combined average realized gold price NG during the first half ($1,169 per ounce compared to $1,238 per ounce in the same period of 2016). The increase in gold ounces sold at Kumtor (269,917 ounces compared to 189,654 ounces in the same period of 2016) reflects the processing of higher grade ore from stockpiled material. In the first half of 2016, lower grade ore was mined and processed from the initial benches in cut-back 17. Mount Milligan sold 106,222 ounces of gold and 28 million pounds of copper during the first half of 2017 which contributed $162.7 million in revenues. The molybdenum business contributed $69.1 million in revenues during the first half of 2017.
Cost of sales increased in the first half of 2017 to $337.1 million compared to $147.9 million in the first half of 2016, mainly resulting 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 $106.2 million in the first half of 2017 as compared to $68.3 million in the same period of 2016 as a result of higher sales and the addition of Mount Milligan and the molybdenum business in the first half of 2017.
In the second quarter of 2017, the Company reduced the carrying value of its Mongolian assets by $41.3 million (pre-tax) to reflect net recoverable value (as stated above).
Operating Costs:
Operating costs (on a sales basis) increased to $170.0 million in the first half of 2017 compared to $79.1 million in the same period of 2016, reflecting more ounces sold at Kumtor and lower operating costs for consumables, partially offset by labour cost increases at Kumtor plus the addition of Mount Milligan and molybdenum business costs.
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 half of 2017 decreased to $746 from $885 in the comparative period mainly as a result of more ounces sold at Kumtor and the addition of gold and copper sales Mount Milligan. This was partially offset by higher capitalized stripping and spending on maintenance and labour at Kumtor and incremental administration costs, as a result of the Thompson Creek acquisition.
5. Liquidity and Capital Resources
The Company believes its cash on hand and working capital as at June 30, 2017, together with future cash flows from operations and cash provided by the Company’s existing credit facilities will be sufficient to fund its anticipated operating cash requirements, although there can be no assurance of this. See “Caution Regarding Forward-Looking Information”.
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Cashflow:
| Unaudited ($ millions, except as noted) Cash provided by operations before changes in working capitalNG - Changes in working capital Cash provided by operating activities Cash used in investing activities: - Capital additions (cash) - Short-term investment purchased, net - other investing items Cash used in investing activities Cash used in financing activities: - Debt (repayment) proceeds - Dividends declared and paid - Payment of interest and borrowing costs - Common shares issued for options exercised Cash (used in) provided by financing activities Increase (decrease) in cash and cash equivalents | Three months ended June 30, | Six months ended June 30, | ||||
|---|---|---|---|---|---|---|
| 2017 | 2016 | % Change | 2017 | 2016 | % Change | |
| 121.9 20.8 | 59.2 (2.0) | 106% (1168%) | 244.7 (33.7) | 86.4 (19.7) | 183% 70% | |
| 142.8 | 57.2 | 149% | 211.1 | 66.7 | 217% | |
| (77.3) (35.0) 18.5 | (45.0) (120.1) (0.8) | 72% (71%) (2381%) | (146.3) (60.0) 11.7 | (80.4) (100.5) (4.5) | 82% (40%) (359%) | |
| (93.8) | (165.9) | (43%) | (194.5) | (185.5) | 5% | |
| (22.5) - (6.6) - | 24.0 (7.4) (3.1) 0.7 | (194%) (100%) 110% (100%) | (60.0) - (15.3) - | 24.0 (14.6) (6.6) 0.7 | (350%) (100%) 132% (100%) | |
| (29.1) | 14.2 | (300%) | (75.3) | 3.4 | (2269%) | |
| 19.9 | (94.5) | 42% | (58.8) | (115.4) | 63% |
In the second quarter of 2017, Centerra generated cash from operations before working capital changesNG of $121.9 million, compared to $59.2 million in the prior period, as a result of higher earnings in the current quarter. The major working capital increase since the beginning of the year was due to the timing of shipments at Kumtor which resulted in a higher receivable balance.
The Company generated $142.8 million in cash from operations in the second quarter of 2017, an increase of $85.6 million compared to the second 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 second quarter of 2017 whereas in the comparative quarter of 2016, Kumtor was impacted by the processing and sale of lower grade ore from the initial benches of cut-back 17.
Cash used in investing activities decreased to $93.8 million in the second quarter of 2017 as compared to $165.9 million the second quarter of 2016, reflecting a decrease in net purchases of short-term investments partially offset by an increase in capital spending (mainly additional capitalized stripping at Kumtor) compared to the same quarter in 2016.
Cash used in financing of $29.1 million in the second quarter of 2017 included debt repayment under the Centerra B.C. Facility (defined below) of $22.5 million, including the quarterly payment of $12.5 million and a mandatory pre-payment of $10.0 million as a result of a $10.0 million cash dividend paid by Centerra B.C. Holdings to Centerra. In the second quarter of 2016, the Company drew $24.0 million on its Corporate Facility (defined below), while making dividend and interest payments which netted $14.2 million of cash from financing activities.
Cash, cash equivalents, restricted cash and short-term investments at June 30, 2017 increased to $401.4 million (including $299.2 million of restricted cash and investments at Kumtor) from $357.8 million at the end of March 2017 (including $273.9 million of restricted cash and investments at Kumtor). At December 31, 2016 cash and investment balances totaled $408.8 million (including $247.8 million of restricted cash at Kumtor).
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The restricted amounts at June 30, 2017 includes $239.2 million of cash and $60.0 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, and declaring or paying dividends or making loans to Centerra. The interim order purports to secure KGC’s potential liability for a claim commenced by SAEPF (defined below). 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 June 30, 2017, the cash and investments balance of KGC increased to $299.2 million (from $273.9 million at March 31, 2017 and $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 June 30, 2017 of $101.2 million includes $22 million that can only be used for Mongolian purposes and $51.6 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 (see “Credit Facilities” for further details.).
Credit Facilities:
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”). $50 million of the Corporate Facility is for the purpose of funding direct and indirect costs associated with 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 June 30, 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.
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 revolving portion of the Centerra B.C. Facility is to be repaid at the end of the five-year term. 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 and the second on June 30, 2017. In addition, Centerra B.C. Holdings must make a matching pre-payment when making distributions to Centerra. In the second quarter of 2017, Centerra B.C. Holdings declared and paid a $10 million dividend to Centerra and in turn made a matching pre-payment of the same amount under the Centerra B.C. Facility.
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As at June 30, 2017, $290.0 million was drawn on the Centerra B.C. Facility ($215 million on the term facility and $75 million on the revolving facility).
Amendment to Centerra B.C. Holdings Credit Facility:
In July 2017, the Company entered into an amendment of the Centerra B.C. Facility to increase the senior secured revolving credit facility under the B.C. Facility (the “Centerra B.C. Revolving Facility”) from $75 million to $125 million, an increase of $50 million provided that the Centerra B.C. Revolving Facility will be reduced by $50 million by June 30, 2019. This will provide the Company with additional liquidity, if required. It also includes additional favourable terms such as permitting upstream distributions of up to $50 million without the matching prepayment requirement. The amendment will be effective upon the satisfaction of a number of conditions precedent, including payment of fees and the execution of specific hedges for the next two years covering production at Mount Milligan from July 2017 to June 2019. These hedges would cover future un-streamed gold and un-streamed copper production at the Mount Milligan mine at a minimum average floor price of $1,200 per gold ounce and minimum average floor price of $2.50 per copper pound.
If the Company were to draw such additional principal amounts under the Centerra B.C. Facility, it would expect a total hedge book to be entered of 176,500 gold ounces and 93,435,000 pounds of copper (inclusive of existing outstanding hedges as at June 30, 2017 (refer section 6. Financial Instruments for summary of existing hedges)) through strategic hedges which would be a combination of collars and forward contracts to both meet minimum pricing requirements and provide beneficial gold and copper price participation.
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 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 specified deadline, or an additional extension is not granted by the lenders, the commitments under the OMAS Facility will be cancelled. On June 29, 2017, the previous deadline of June 30, 2017 for satisfaction of the conditions precedent was extended to December 31, 2017. As at June 30, 2017, the OMAS Facility remains undrawn.
Centerra was in compliance with the terms of all of its facilities in the second quarter of 2017.
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