Centerra Gold Favourably Revises 2016 Guidance and Reports Second Quarter Results
NEWS RELEASE Centerra Gold Favourably Revises 2016 Guidance and Reports Second Quarter Results
This news release contains forward-looking information that is subject to the risk factors and assumptions set out on page 26 and in the Cautionary Note Regarding Forward-looking Information on page 31. It should be read in conjunction with the Company’s unaudited interim condensed consolidated financial statements and notes for the three and six months ended June 30, 2016 and the associated Management’s Discussion and Analysis. The condensed interim 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.
To view Management’s Discussion and Analysis and the Unaudited Interim Consolidated Financial Statements and Notes for the three and six months ended June 30, 2016, please visit the following link:
http://media3.marketwire.com/docs/cg726-mdafs.pdf
Toronto, Canada, July 26, 2016: Centerra Gold Inc. (TSX: CG) today reported net earnings of $2.9 million or $0.01 per common share (basic) in the second quarter of 2016, compared to a net earnings of $21.9 million or $0.09 per common share (basic) for the same period in 2015, reflecting the processing and sale in the second quarter of 2016 of lower grade material from stockpiles and ore from the initial benches of cut-back 17 at Kumtor, partially offset by higher average realized gold prices and lower share-based compensation expense.
For the first six months of 2016, the Company recorded net earnings of $21.0 million or $0.09 per common share (basic), compared to a net earnings of $62.6 million or $0.26 per common share (basic) in the comparative period of 2015, reflecting a 36% decrease in gold ounces sold in the first half of 2016.
2016 Second Quarter Highlights
- Favourably revised gold production guidance range to 500,000 to 530,000 ounces and lowered all-in sustaining cost1 guidance for Kumtor to $717 - $759 per ounce and Company-wide to $776 - $824 per ounce.
- Received the maximum allowable emissions (“MAE”) and the maximum allowable discharge (“MAD”) permits at Kumtor for 2016, followed by the environmental expertise (approval) of Kumtor’s 2016 mine plan which was received on June 27, 2016. With the issuance of the MAE and MAD permits and the receipt of the environmental expertise, Kumtor has the necessary permits and approvals in place for continuous operations throughout the second half of 2016.
- Produced 97,724 ounces of gold at Kumtor at all-in sustaining costs1 of $768 per ounce sold, gold production was in line with the Company’s forecast, while all-in sustaining costs1 (AISC) were lower than forecast.
- Sold 127,909 ounces of gold in the quarter, which includes sales of 33,165 ounces of accumulated gold doré inventory at Kumtor as a result of delays in shipping doré in the first quarter of 2016.
1 Non-GAAP measure, see discussion under “Non-GAAP Measures”. All-in sustaining costs exclude revenue-based taxes in the Kyrgyz Republic and income taxes.
- Company-wide all-in sustaining costs per ounce sold1 for the second quarter were $822 due in part to more ounces sold.
- Continued discussions with the Mongolian Government regarding finalizing definitive agreements relating to the Gatsuurt Project. Discussions are expected to continue in the third quarter of 2016.
- Following the quarter-end, the Company announced on July 5, 2016 that it had entered into a definitive arrangement agreement with Thompson Creek Metals Company Inc. (“TCM”) to acquire all of the issued and outstanding common shares of TCM and redeem all of TCM’s secured and unsecured notes at their call price plus accrued and unpaid interest in accordance with their terms. The total transaction value is approximately $1.1 billion. Centerra has also entered into a binding commitment letter with Royal Gold Inc. (“Royal Gold”) whereby, upon the closing of the Arrangement, Royal Gold’s 52.25% gold streaming interest at Mount Milligan will be amended to a 35.00% gold stream and 18.75% copper stream. Centerra expects to finance the acquisition through a combination of a new US$325 million senior secured revolver and term loan facility provided by The Bank of Nova Scotia and a recently completed bought deal offering of subscription receipts of C$170 million (total gross proceeds of C$195.5 million including underwriters fully-exercised overallotment; net proceeds after fees of C$185.7 million). Refer to the Company’s July 20, 2016 news release for further details. The acquisition is subject to the approval of TCM shareholders and other applicable regulatory approvals, and satisfaction of other customary conditions. If approved, the transaction is expected to close in the fall of 2016.
Centerra’s cash, cash equivalents and short-term investments at the end of the second quarter of 2016 increased $25.6 million to $527.4 million compared to the March 31, 2016. During the second quarter of 2016, the Company drew $24 million from its $150 million corporate revolving credit facility provided by the European Bank for Reconstruction and Development to bring its current principal amount outstanding to $100 million at June 30, 2016. The funds are available to be re-drawn on a semi-annual basis and at the Company’s discretion repayment of the loaned funds may be extended until 2021.
CEO Commentary
Scott Perry CEO of Centerra Gold stated, “Kumtor delivered strong gold production in the quarter producing 97,724 ounces which was in line with our expectations and plans. Kumtor’s all-in sustaining costs were a competitive $768 per ounce sold1 well below our original guidance for the year. With mining activities at Kumtor slightly ahead of plan and the business improvement opportunities achieved so far this year combined with the favourable diesel fuel costs and currency exchange rate environment, we have decided to favourably revise our guidance for gold production, AISC1 and capital expenditures.”
“With our second quarter released today, the Company favourably revised its guidance for the year, narrowing expected gold production to 500,000 – 530,000 ounces, lowered our expected all-in sustaining costs1 by 14% at Kumtor to $738 per ounce sold and 14% Company-wide to $800 per ounce sold, based on the mid-point of the ranges, and lowered our overall expected capital expenditures for the year to $140 million a 48% decrease, excluding capitalized stripping. We are well positioned to achieve our revised gold production and cost guidance for the year, since mining at Kumtor recently intersected the higher grade ore in the SB Zone in cut-back 17.”
“Following the quarter end, we announced a transformational $1.1 billion business combination of Centerra and Thompson Creek that diversifies Centerra’s operating platform and adds low risk production and cash flow from a very high quality, long-lived asset in Mount Milligan. This business combination is complementary in nature, combining Centerra’s robust balance sheet with Thompson Creek’s high quality asset base. We expect the transaction to close in the fall of 2016 and will create a geographically and operationally diversified gold producer with a high quality producing platform and a strong fully-funded growth pipeline.”
Consolidated Financial and Operating Summary
| Unaudited ($ millions, except as noted) | Three months ended June 30,(7) | Six months ended June 30,(7) | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Financial Highlights | 2016 | 2015 | % Change | 2016 | 2015 | % Change | ||||
| Revenue | $ | 161.6 | $ | 146.8 | 10% | $ | 234.8 | $ | 359.4 | (35%) |
| Cost of sales | 118.0 | 81.0 | 46% | 149.5 | 195.0 | (23%) | ||||
| Standby costs | (0.6) | 1.1 | (155%) | (0.7) | 3.8 | (118%) | ||||
| Regional office administration | 3.7 | 5.0 | (26%) | 7.0 | 10.3 | (32%) | ||||
| Earnings from mine operations | 40.5 | 59.7 | (32%) | 79.0 | 150.3 | (47%) | ||||
| Revenue-based taxes | 22.6 | 19.8 | 14% | 32.9 | 48.5 | (32%) | ||||
| Other operating expenses | 0.7 | 0.8 | (13%) | 1.3 | 0.6 | 117% | ||||
| Pre-development project costs | 4.0 | 4.9 | (18%) | 5.3 | 8.2 | (35%) | ||||
| Exploration and business development (1) | 5.1 | 2.1 | 143% | 7.2 | 4.9 | 47% | ||||
| Corporate administration | 6.8 | 10.8 | (37%) | 12.5 | 20.2 | (38%) | ||||
| Earnings from operations | 1.3 | 21.3 | (94%) | 19.8 | 67.9 | (71%) | ||||
| Other (income) and expenses | (0.4) | (1.7) | (76%) | (1.7) | 2.6 | (165%) | ||||
| Finance costs | 1.4 | 1.1 | 27% | 2.7 | 2.2 | 23% | ||||
| Earnings before income taxes | 0.3 | 21.8 | (99%) | 18.9 | 63.2 | (70%) | ||||
| Income tax expense (benefit) | (2.6) | (0.1) | 2500% | (2.1) | 0.6 | (450%) | ||||
| Net earnings | 2.9 | 21.9 | (87%) | 21.0 | 62.6 | (66%) | ||||
| Earnings per common share - $ basic (2) | $ | 0.01 | $ | 0.09 | (89%) | $ | 0.09 | $ | 0.26 | (65%) |
| Earnings per common share - $ diluted (2) | $ | - | $ | 0.09 | (100%) | $ | 0.08 | $ | 0.26 | (69%) |
| Cash provided by operations | 57.2 | 114.6 | (50%) | 66.7 | 245.0 | (73%) | ||||
| Average gold spot price - $/oz (3) | 1,260 | 1,192 | 6% | 1,223 | 1,206 | 1% | ||||
| Average realized gold price - $/oz(4) | 1,264 | 1,192 | 4% | 1,238 | 1,205 | 1% | ||||
| Capital expenditures (5) | 53.6 | 86.7 | (38%) | 100.7 | 242.2 | (58%) | ||||
| Operating Highlights | ||||||||||
| Gold produced – ounces | 97,724 | 125,088 | (22%) | 185,316 | 295,771 | (37%) | ||||
| Gold sold – ounces | 127,909 | 123,079 | 4% | 189,653 | 298,311 | (36%) | ||||
| Operating costs (on a sales basis) (6) | 61.6 | 36.0 | 71% | 80.7 | 79.5 | 1% | ||||
| Adjusted operating costs (4) | 65.5 | 42.7 | 53% | 88.5 | 94.5 | (6%) | ||||
| All-in Sustaining Costs(4) | 105.2 | 115.3 | (9%) | 167.9 | 241.2 | (30%) | ||||
| All-in Costs, excluding development projects(4) | 114.4 | 121.3 | (6%) | 185.1 | 256.4 | (28%) | ||||
| All-in Costs, excluding development projects | ||||||||||
| (including revenue-based taxes and tax) (4) | 137.2 | 141.2 | (3%) | 218.2 | 305.1 | (28%) | ||||
| Unit Costs | ||||||||||
| Cost of sales - $/oz sold(4) | 923 | 658 | 40% | 788 | 654 | 21% | ||||
| Adjusted operating costs - $/oz sold (4) | 512 | 347 | 48% | 467 | 317 | 47% | ||||
| All-in sustaining costs – $/oz sold(4) | 822 | 937 | (12%) | 885 | 808 | 10% | ||||
| All-in costs, excluding development projects – | ||||||||||
| $/oz sold (4) | 894 | 986 | (9%) | 976 | 859 | 14% | ||||
| All-in costs, excluding development projects | ||||||||||
| (including revenue-based taxes and income tax) | ||||||||||
| – $/oz sold (4) | 1,072 | 1,147 | (7%) | 1,151 | 1,022 | 13% |
(1) Includes business development of $2.1 million for the three and six months ended June 30, 2016 ($0.8 million and $1.9 million for the three and six months ended June 30, 2015, respectively).
(2) As at June 30, 2016, the Company had 242,164,285 common shares issued and outstanding.
(3) Average for the period as reported by the London Bullion Market Association (US dollar Gold P.M. Fix Rate).
(4) Adjusted operating costs, all-in sustaining costs, all-in costs, excluding development projects and all-in costs, excluding development projects (including taxes) ($ millions and per ounce sold) as well as average realized gold price per ounce and cost of sales per ounce sold are non-GAAP measures and are discussed under “Non-GAAP Measures”.
(5) Includes capitalized stripping of $25.6 million and $39.7 million in the three and six months ended June 30, 2016, respectively ($66 million and $133.5 million of capitalized stripping in the three and six months ended June 30, 2015, respectively).
(6) Operating costs (on a sales basis) are comprised of mine operating costs such as mining, processing, regional office administration, royalties and production taxes (except at Kumtor where revenue-based taxes are excluded), but excludes reclamation costs and depreciation, depletion and amortization. Operating costs (on a sales basis) represents the cash component of cost of sales associated with the ounces sold in the period.
(7) Results may not add due to rounding.
Second Quarter 2016 compared to Second Quarter 2015
- Gold production for the second quarter of 2016 totaled 97,724 ounces compared to 125,088 ounces in the comparative quarter of 2015. The 22% decrease in ounces poured at Kumtor reflects processing of lower grade ore mined from the upper benches of cut-back 17, blended with low-grade stockpiled ore, as well as lower recoveries. In contrast, in the comparative quarter of 2015 Kumtor mined and processed the final benches from cut-back 16 that contained higher grade ore.
- Operating costs (on a sales basis) increased 71% to $61.6 million in the second quarter of 2016 from $36.0 million in the same period of 2015 and reflect more ounces sold and higher unit costs in the second quarter of 2016. The increase in costs in the second quarter of 2016 was due to processing ounces at Kumtor from cut-back 17 which is a larger cut-back, requiring more waste to be moved and resulting in higher mining unit costs as compared to cut-back 16. Capitalization of mining costs in cutback 17 ceased when ore was uncovered in September 2015. In the comparative period of 2015, the mining costs were capitalized as mining was focused on the initial development of cut-back 17 before accessing ore.
- All-in sustaining costs per ounce sold1 for the second quarter decreased to $822 from $937 in the comparative period of 2015. The decrease in the second quarter of 2016 results primarily from more ounces sold and less spending on capitalized stripping.
- All-in costs per ounce sold1, (excluding development project costs), were $894 compared to $986 in the comparative quarter of 2015 and includes all cash costs related to gold production, excluding revenuebased taxes and income tax. The decrease reflects the additional ounces sold, partially offset by additional spending in the second quarter of 2016 for exploration and business development.
- Revenue in the second quarter of 2016 increased 10% to $161.6 million, as a result of 4% more ounces sold (127,909 ounces compared to 123,079 ounces in the second quarter of 2015), as well as a 4% higher average realized gold price1 ($1,240 per ounce compared to $1,192 per ounce in the same quarter of 2015). The build-up of gold bullion inventory at Kumtor at the end of March 2016 of 33,165 ounces was sold in April 2016 once Kyrgyzaltyn completed contractual negotiations with its off-take bank.
- In the second quarter of 2016, 4% more ounces were sold while cost of sales increased by 46% to $118 million compared to the same period of 2015. This reflects higher costs for mining and stripping in both the stockpiled ore and in the lower grade ore mined and processed at Kumtor from cut-back 17 in the second quarter of 2016. The cost of sales in the second quarter of 2015 benefited from the processing of ore from the final benches of cut-back 16 which contained higher grades and higher recoveries, resulting in lower unit operating costs, and reduced waste stripping as compared to cut-back 17 ore that was processed in the second quarter of 2016. Depreciation, depletion and amortization (“DD&A”) associated with production was $57.1 million in the second quarter of 2016 as compared to $46.5 million in the same quarter of 2015, reflecting more ounces sold in 2016 and higher equipment charges for the longer mining campaign of cut-back 17.
- Regional office administration costs in the second quarter of 2016 decreased by 26% to $3.7 million, reflecting lower labour costs at Kumtor from favourable currency movements of the Kyrgyz Som and lower staffing levels in Mongolia.
- In the second quarter of 2016, pre-development projects costs decreased by $0.9 million to $4.0 million, compared to the same quarter in 2015. The decrease was due to the Company starting to capitalize development costs at the Öksüt Project following the approval of the feasibility study in July 2015, partially offset by higher spending at the Greenstone Property.
- Exploration expenditures in the second quarter totaled $3.0 million compared to $1.3 million in the same period of 2015. The increase in the second quarter of 2016 reflects higher exploration activity at the Company’s various projects including the Gatsuurt property.
- Corporate administration costs decreased to $6.8 million in the second quarter of 2016 from $10.8 million in the same period of 2015. The decrease was primarily due to lower share-based compensation, the impact of currency movements and lower general spending. Share-based compensation expense in the second quarter of 2016 was $0.1 million compared to $5.1 million in the same period of 2015, reflecting the relative performance of the Company’s share price as compared to the S&P/TSX Global Gold Index.
- Cash provided by operations decreased by $57.4 million to $57.2 million in the second quarter of 2016 mainly from the sale of the higher cost ounces from the initial benches of cut-back 17 and higher working capital levels for amounts receivable due to the timing of gold shipments in the second quarter of 2016.
- Total capital expenditures in the second quarter of 2016 were $53.7 million, which included sustaining capital1 of $13.7 million, growth capital1 of $8.4 million, $1.6 million of Öksüt Project development costs, $4.4 million of Greenstone Gold Property capital and $25.6 million of capitalized stripping costs ($18.9 million cash). Capital expenditures were 38% lower in the second quarter of 2016 as a result of lower capitalized stripping at Kumtor (a decrease of 61%), partially offset by increased sustaining capital1 (an increase of 14%), increased growth capital1 (an increase of 91%) and 2% more Greenstone Gold Property costs. Capital expenditures in the same quarter of 2015 were $86.7 million, which included $12.0 million for sustaining capital1, $4.4 million for growth capital1, $4.3 million of Greenstone Gold Property capital and capitalized stripping of $66.0 million ($49.5 million cash).
First Half 2016 compared to First Half 2015
- Gold production for the first six months of 2016 totaled 185,316 ounces compared to 292,176 ounces in the comparative period of 2015. The decrease in production is primarily due to lower average mill head grades processed and lower recoveries at Kumtor.
- Operating costs (on a sales basis)1 increased by $1.2 million to $80.7 million in the first six months of 2016 compared to the same period in 2015, mainly as a result of higher per unit operating costs for the ounces from cut-back 17 processed and sold in the first six months of 2016.
- All-in sustaining costs per ounce sold1 for the first six months of 2016, was $885 compared to $808 in the same period of 2015. The increase in the first six months of 2016 reflects the higher per unit cost for the cut-back 17 ounces sold in the first six months of 2016 and higher sustaining capital1.
- All-in costs per ounce sold1, (excluding development project costs) which excludes revenue-based taxes at Kumtor and income tax, for the first six months of 2016 were $976, compared to $859 per ounce sold in the first six months of 2015. The increase reflects the higher all-in sustaining costs described above and higher exploration costs.
- Revenue in the first six months of 2016 decreased 35% to $234.8 million, as a result of 36% fewer ounces sold (189,653 ounces compared to 298,311 ounces in the first six months of 2015), partially offset by higher average realized gold price1 ($1,217 per ounce compared to $1,205 per ounce in the first six months of 2015).
- In the first six months of 2016, cost of sales decreased by 23% to $149.5 million due primarily to fewer ounces sold in the first six months of 2016. DD&A associated with production decreased to $68.8 million in the first six months of 2016 from $115.6 million in the comparative period of 2015, reflecting
fewer ounces sold, partially offset by higher per unit capitalized stripping charges for the cut-back 17 ore that was processed in the first six months of 2016.
- The idled operation at Boroo incurred minimal net costs in the first six months of 2016 as care and maintenance costs were offset by the sale of residual gold coming from the rinsing of the heap leach pad. During the first six months of 2015 Boroo incurred standby costs to place and maintain the mill and operation on care and maintenance totaling $3.8 million, which included spending mainly for cleaning circuits and to maintain equipment in a ready state, as well as fixed costs for administration. In the first six month of 2016, pre-development projects costs decreased by $2.9 million to $5.3 million,
• compared to the same period in 2015, mainly reflecting the start of capitalization of development costs at the Öksüt Project following the approval of the feasibility study in July 2015.
- Exploration expenditures in the first six months totalled $5.1 million compared to $3 million in the same period of 2015. The increase in the first six months of 2016 reflects higher exploration spending at Gatsuurt and on the Company’s other projects around the world.
- Business development spending in the first six months of 2016 totaled $2.1 million compared to $1.9 million.
- Corporate administration costs in the first half of 2016 decreased to $12.5 million from $20.2 million in the first six months of 2015 due primarily to a lower charge for share-based compensation. The sharebased compensation charge in the first six months of 2016 was $1.0 million, compared to $7.4 million in the same period in 2015.
- Cash provided by operating activities decreased to $66.7 million in the first six months of 2016 mainly from lower sales and higher working capital levels for gold inventory and amounts receivable due to the timing of gold shipments.
- Total capital expenditures in the first six months of 2016 were $100.6 million, which included sustaining capital1 of $36.9 million, growth capital1 of $13.6 million, $5.2 million of Greenstone Gold Property capital costs and $39.7 million of capitalized stripping costs ($29.3 million cash) at Kumtor. ). Total capital expenditures were 58% lower for the first six months of 2016 as a result of 70% lower capitalized stripping costs at Kumtor, partially offset by higher sustaining capital1 (an increase of 49%) and a 26% increase in growth capital1. Capital expenditures in the same period of 2015 were $242.3 million, which included $24.7 million for sustaining capital1, $10.8 million for growth capital1, capitalized stripping of $133.5 million ($101.2 million cash) and $67.4 million of acquisition costs for the Greenstone Partnership.
Second Quarter Operations Update Kumtor Mine
| Kumtor Operating Results | Three months ended June 30, | Six months ended June 30, | ||||
|---|---|---|---|---|---|---|
| % | % | |||||
| Unaudited ($ millions, except as noted) | 2016 | 2015 | Change | 2016 | 2015 | Change |
| Tonnes mined - 000s | 34,744 | 40,434 | (14%) | 74,018 | 82,165 | (10%) |
| Tonnes ore mined – 000s | 2,891 | 168 | 1,621% | 4,717 | 1,506 | 213% |
| Average mining grade - g/t | 1.84 | 1.50 | 23% | 1.64 | 3.10 | (47%) |
| Tonnes milled - 000s | 1,609 | 1,554 | 4% | 3,151 | 2,729 | 15% |
| Average mill head grade - g/t | 2.63 | 3.26 | (19%) | 2.46 | 4.06 | (39%) |
| Recovery - % | 71.9% | 77.5% | (7%) | 73.3% | 79.4% | (8%) |
| Mining costs - total ($/t mined material) | 1.36 | 1.27 | 7% | 1.28 | 1.30 | (2%) |
| Milling costs ($/t milled material) | 9.80 | 10.50 | (7%) | 9.91 | 11.86 | (16%) |
| Gold produced – ounces | 97,724 | 122,111 | (20%) | 184,168 | 286,383 | (36%) |
| Gold sold – ounces | 127,909 | 118,789 | 8% | 189,653 | 287,974 | (34%) |
| Average realized gold price - $/oz(1) | 1,264 | 1,192 | 6% | 1,238 | 1,204 | 3% |
| Capital expenditures (sustaining)(1) | 13.6 | 11.8 | 15% | 36.6 | 24.3 | 51% |
| Capital expenditures (growth)(1) | 5.4 | 3.9 | 38% | 10.1 | 10.4 | (3%) |
| Capital expenditures (stripping) | 25.6 | 66.0 | (61%) | 39.7 | 133.5 | (70%) |
| Capital expenditures (total) | 44.6 | 81.7 | (45%) | 86.4 | 168.2 | (49%) |
| Operating costs (on a sales basis) (2) | 61.6 | 32.7 | 88% | 80.7 | 70.8 | 14% |
| Adjusted operating costs (1) | 65.4 | 37.6 | 74% | 88.3 | 80.6 | 10% |
| All-in Sustaining Costs (1) | 98.1 | 99.1 | (1%) | 154.7 | 206.6 | (25%) |
| All-in Costs(1) | 103.5 | 103.0 | 0% | 164.8 | 216.9 | (24%) |
| All-in Costs - including revenue-based taxes(1) | 126.1 | 122.8 | 3% | 197.7 | 265.4 | (26%) |
| Adjusted operating costs - $/oz sold (1) | 511 | 317 | 61% | 466 | 280 | 66% |
| All-in sustaining costs – $/oz sold (1) | 768 | 835 | (8%) | 816 | 717 | 14% |
| All-in costs – $/oz sold (1) | 810 | 867 | (7%) | 869 | 753 | 15% |
| All-in costs (including revenue-based taxes)–$/oz | ||||||
| sold(1) | 987 | 1,034 | (5%) | 1,043 | 922 | 13% |
(1) Adjusted operating costs, all-in sustaining costs, all-in costs and all-in costs – including revenue-based taxes (in $ millions and per ounce sold), as well as average realized gold price per ounce sold, cost of sales per ounce sold and capital expenditures (sustaining and growth) are non-GAAP measures and are discussed under “Non-GAAP Measures”.
(2) Operating costs (on a sales basis) is comprised of mine operating costs such as mining, processing, regional office administration, royalties and production taxes (except at Kumtor where revenue-based taxes are excluded), but excludes reclamation costs and depreciation, depletion and amortization.
At the Kumtor mine in the Kyrgyz Republic, mining activities in the second quarter of 2016 focused on the development and mining of cut-back 17. During the quarter increasingly greater quantities of lower grade ore were obtained from the upper benches of cut-back 17 and Kumtor continued to process ore from cut-back 17 and ore stockpiled from the previous year. The Company has recently intersected the higher grade ore from the SB Zone from cut-back 17 which is anticipated to provide the majority of the ounces processed during the remainder of the current year.
Cut-back 17 is unlike past cut-backs at Kumtor since it is significantly larger in size and mining of the ore is spread over a longer period of time. The typical profile of mining a cut-back at Kumtor, starts with waste removal (capitalized stripping), followed by a short period of mining in significantly higher grade ore. Cutback 16 followed the typical profile, with the completion of mining higher grade ore in early 2015. In contrast, cut-back 17 required a longer stripping period to uncover low grade ore in September 2015 (date when capitalization of stripping stopped), followed by an extended period of mining lower grade ore until the recent intersection of higher grade ore at the end of the second quarter of 2016. Due to the extended mining period, the result has been more mining costs being absorbed by the lower grade ore mined in cut-back 17 from September 2015 until now.
Total waste and ore mined in the second quarter of 2016 decreased 14% to 34.7 million tonnes compared to 40.4 million tonnes in the comparative period of 2015. The decrease was mainly due to 14.6% increased average haulage distance compared to the same period of 2015 (4.3 kilometres compared to 3.7 kilometres), as mining in the second quarter of 2016 was at greater depth and longer hauls were required to the Lysii Valley northern dumps as set forth in the life-of-mine plan. During the second quarter of 2016, Kumtor mined approximately 2.9 million tonnes of ore at an average grade of 1.84 g/t, compared to 0.2 million tonnes of ore mined at an average grade of 1.50 g/t in the second quarter of 2015.
During the second quarter of 2016, Kumtor continued to process ore from cut-back 17 and ore stockpiled from the previous year. Gold production for the second quarter of 2016 was 97,724 ounces of gold compared to 122,111 ounces of gold in the comparative period of 2015. The decrease in ounces poured is due processing lower grade ore from stockpiles and from cut-back 17. In contrast, during the comparative quarter of 2015, the Company processed higher grade stockpiled ore mined from the lower benches of cut-back 16.
During the quarter, Kumtor processed 1.6 million tonnes, 4% more than the second quarter of 2015. Kumtor’s average mill head grade was 2.63 g/t with a recovery of 71.9% in the second quarter of 2016, compared to 3.26 g/t with a recovery of 77.5% for the same period of 2015. The mill achieved increased throughput in the second quarter of 2016 averaging 17,700 tonnes per day compared to 17,100 tonnes per day in the comparative quarter. Actions taken to increase the throughput have included blending harder and softer ore, opening screens in the SAG mill and increasing the grinding media sizes in the SAG and ball mills.
Operating costs (on a sales basis), increased by $28.9 million predominantly due to increased sales, and processing ounces in the second quarter of 2016 with greater mining costs as cut-back 17 ounces require more waste tonnes to be moved. In the comparative period of 2015, the mining costs were capitalized as they were focused on the initial development stages of cut-back 17, before accessing ore.
Mining costs, before capitalization of stripping activity, totalled $47.1 million in 2016, which was $4.1 million lower than the comparative period. Decreased costs for the second quarter of 2016 include lower diesel costs ($4.2 million) due to lower fuel price, and lower blasting costs ($0.7 million). This was partially offset by higher costs for tires ($0.9 million) due to the timing of tire replacements during the quarter.
Milling costs of $15.7 million in the second quarter of 2016 compared to $16.4 million in the comparative quarter of 2015. Milling costs in 2016 were lower than the comparative period due mainly to the lower cost of cyanide ($0.3 million)
Site support costs in the second quarter of 2016 totalled $10.9 million compared to $11.9 million in the second quarter of 2015. The decrease is primarily attributable to lower insurance costs resulting from lower premiums, and lower labour costs due to a reduction in manpower.
DD&A associated with sales, increased to $56.4 million in the second quarter of 2016, from $43.5 million in the comparative quarter of 2015. The increase in DD&A is mainly due to the increased depreciation charges relating to the ounces processed from cut-back 17 compared to the ounces processed in the comparative period and the higher ounces sold in the second quarter of 2016.
All-in sustaining costs per ounce sold1, which excludes revenue-based taxes, for the second quarter of 2016 decreased 8% to $768 compared to $835 in the comparative period of 2015. The decrease results primarily from the higher ounces sold, as the Company sold the 33,165 ounces that were delayed at the end of March 2016 due to the contractual negotiations between Kyrgyzaltyn and its off-take bank.
All-in costs per ounce sold1, which excludes revenue-based taxes, for the second quarter of 2016 was $810 compared to $867 in the comparative period of 2015, representing a decrease of 7%. The decrease is a result of lower all-in sustaining costs1, as explained above.
Capital expenditures in the second quarter of 2016 totaled $44.6 million which includes $13.6 million of sustaining capital1 mainly on equipment rebuilds and overhauls, $5.4 million invested in growth capital1 and $25.6 million for capitalized stripping ($18.9 million cash). Capital expenditures the comparative quarter of 2015 totaled $81.7 million, consisting of $11.8 million for sustaining capital1, $3.9 million for growth capital1 and $66.0 million of capitalized stripping ($49.5 million cash).
Development Projects
Öksüt Project
At the Öksüt Project in Turkey, the Company spent $1.6 million and $5.2 million during the three and six months ended June 30, 2016 respectively ($1.8 million and $3.6 million in the three and six months ended June 30, 2015) on development activities to progress the ESIA, access and site preparation and detailed engineering works. With the approval of the feasibility study in July 2015, development costs at the Öksüt Project are now being capitalized.
Following approval of the business opening permit from local authorities in December 2015, applications were submitted for the land usage permits (Forestry and Pastureland). On July 14, 2016, the Company’s wholly-owned Turkish subsidiary Öksüt Madencilik Sanayi ve Ticaret A.S. (“OMAS”) received the Forestry Usage Permit for the project. The Pastureland permit is currently outstanding and the Company is working with the relevant agencies to obtain the permit, which is expected shortly. There are no assurances that the approval of the Pastureland permit or other permits will be obtained by the Company in the anticipated time frame, or at all.
The Company now expects to commence development of the Öksüt Project in the fourth quarter of 2016 due to delays in receiving operating permits, with first gold production anticipated in mid-2018. On September 3, 2015 a Technical Report for the Öksüt Project was filed on SEDAR.
On April 5, 2016, OMAS entered into a $150 million credit facility agreement with UniCredit Bank AG to assist in financing the construction of the Company’s Öksüt Project. The interest rate on the Öksüt Facility is LIBOR plus 2.65% to 2.95% (dependent on project completion status). It is secured by Öksüt assets and is non-recourse to the Company. Availability of the Öksüt Facility is subject to customary conditions precedent, including receipt of all necessary approvals.
The Company’s operations in Turkey have not been affected by recent political developments; however no assurances can be provided in this regard.
Gatsuurt Project
The Company continued to engage in discussions with the Mongolian Government regarding the definitive agreements relating to the Gatsuurt Project, during the quarter. The Company is currently drilling on the property and is carrying out resource definition, metallurgical, exploration, geo-technical and hydrogeological drilling in support of eventual project development. See “Other Corporate Developments – Mongolia”.
Greenstone Gold Property
In the second quarter of 2016, the Company funded $7.3 million ($10.9 million in the first six months of 2016) on project development activities ($28.2 million, cumulative to date) at Greenstone Gold Mine Limited Partnership (“GGM”). During the second quarter, work continued on advancing the feasibility study for the Hardrock Project, including completing peer reviews with third party engineers, with results to be incorporated into the final bankable feasibility study. GGM has decided to optimize certain aspects of the study to improve the economics and has delayed the completion of the feasibility study to the end of October 2016. During the second quarter of 2016, GGM exercised purchase options totaling $5.4 million to acquire houses and land surrounding the project area.
GGM submitted a draft Environmental Impact Study/Environmental Assessment (“EIS/EA”) in February 2016 and received comments from the various provincial and federal regulatory agencies, as well as from all other stakeholders. GGM, along with their consultants, have been reviewing and evaluating these comments, consulted with the regulators, and amendments will be addressed in the final EIS/EA submission, which is expected to occur a few months after the completion of the bankable feasibility study.
GGM continues to engage and consult with local communities of interest regarding mutually beneficial impact benefit agreements.
Non-GAAP Measures
This news release contains the following non-GAAP financial measures: all-in sustaining costs, all-in costs, and all-in costs (excluding development projects), all three measures with and without revenue-based taxes and income taxes. In addition, non-GAAP financial measures include adjusted operating costs in dollars (millions) and per ounce sold, as well as cost of sales per ounce sold, capital expenditures (sustaining), capital expenditures (growth) and average realized gold price. These financial measures do not have any standardized meaning prescribed by GAAP and are therefore unlikely to be comparable to similar measures presented by other issuers, even as compared to other issuers who may be applying the World Gold Council (“WGC”) guidelines, which can be found at http://www.gold.org.
Management believes that the use of these non-GAAP measures will assist analysts, investors and other stakeholders of the Company in understanding the costs associated with producing gold, understanding the economics of gold mining, assessing our operating performance, our ability to generate free cash flow from current operations and to generate free cash flow on an overall Company basis, and for planning and forecasting of future periods. However, the measures do have limitations as analytical tools as they may be influenced by the point in the life cycle of a specific mine and the level of additional exploration or expenditures a company has to make to fully develop its properties. Accordingly, these non-GAAP measures should not be considered in isolation, or as a substitute for, analysis of our results as reported under GAAP.
Definitions
The following is a description of the non-GAAP measures used in this news release. The definitions are similar to the WGC’s Guidance Note on these non-GAAP measures:
- Production costs represent operating costs associated with the mining, milling and site administration activities at the Company’s operating sites, excluding costs unrelated to production such as mine standby and community costs related to current operations.
Operating costs (on a sales basis) include mine operating costs such as mining, processing, site • support, royalties and operating taxes (except at Kumtor where revenue-based taxes are excluded), but exclude depreciation, depletion and amortization (DD&A), reclamation costs, financing costs, capital development and exploration.
- Adjusted operating costs per ounce sold include operating costs (on a sales basis), regional office administration, mine standby costs, community costs related to current operations, refining fees and by-product credits.
Capital expenditure (Sustaining) is a capital expenditure necessary to maintain existing levels of • production. The sustaining capital expenditures maintain the existing mine fleet, mill and other facilities so that they function at levels consistent from year to year.
- All-in sustaining costs per ounce sold include adjusted operating costs, the cash component of capitalized stripping costs, corporate general and administrative expenses, accretion expenses, and sustaining capital. The measure incorporates costs related to sustaining production.
Capital expenditure (Growth) is capital expended to expand the business or operations by increasing • productive capacity beyond current levels of performance.
- All-in costs per ounce sold include all-in sustaining costs and additional costs for growth capital, global exploration expenses, business development costs and social development costs not related to current operations.
- All-in cost per ounce sold exclude the following:
- Working capital (except for adjustments to inventory on a sales basis).
- All financing charges (including capitalized interest).
- Costs related to business combinations, asset acquisitions and asset disposals.
- Other non-operating income and expenses, including interest income, bank charges, and foreign exchange gains and losses.
- All-in costs per ounce sold (excluding development project costs) measure comprises all-in costs per ounce sold as described above and excludes the Company’s development projects.
Development projects are defined as projects that are beyond the exploration stage but are pre- • operational. For 2016, development projects include all spending at Öksüt, Gatsuurt and the Greenstone Gold Property.
- Development projects costs represent spending on development projects whether expensed as predevelopment costs or capitalized as development costs.
- All-in costs including taxes per ounce sold measure includes revenue-based taxes at Kumtor and income taxes in Mongolia.
- Cost of sales per ounce sold is calculated by dividing cost of sales by gold ounces sold.
- Average realized gold price is calculated by dividing revenue derived from gold sales by the number of ounces sold.
Adjusted Operating Cost, All-in Sustaining Costs and All-in Costs, excluding development project costs (including and excluding revenue-based taxes and income taxes) are non-GAAP measures used in this news release and can be reconciled as follows:
(1) By operation
| Kumtor | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| (unaudited) | Three months ended June 30,(1) | Six months ended June 30,(1) | |||||||
| ($ millions, unless otherwise specified) | 2016 | 2015 | 2016 | 2015 | |||||
| Cost of sales, as reported | $ | 118.0 | $ | 76.2 | $ | 149.5 | $ | 183.1 | |
| Less: Non-cash component | 56.4 | 43.5 | 68.8 | 112.3 | |||||
| Cost of sales, cash component | $ | 61.6 | $ | 32.7 | $ | 80.7 | $ | 70.8 | |
| Adjust for: | |||||||||
| Regional office administration | 3.7 | 4.1 | 7.0 | 8.4 | |||||
| Refining fees | 1.0 | 0.7 | 1.4 | 1.7 | |||||
| By-product credits | (1.2) | (0.5) | (1.6) | (1.5) | |||||
| Community costs related to current operations | 0.3 | 0.6 | 0.8 | 1.2 | |||||
| Adjusted Operating Costs | $ | 65.4 | $ | 37.6 | $ | 88.3 | $ | 80.6 | |
| Accretion expense | 0.2 | 0.2 | 0.5 | 0.5 | |||||
| Capitalized stripping and ice unload | 18.9 | 49.5 | 29.3 | 101.2 | |||||
| Capital expenditures (sustaining) | 13.6 | 11.8 | 36.6 | 24.3 | |||||
| All-in Sustaining Costs | $ | 98.1 | $ | 99.1 | $ | 154.7 | $ | 206.6 | |
| Capital expenditures (growth) | 5.4 | 3.9 | 10.1 | 10.3 | |||||
| All-in Costs | $ | 103.5 | $ | 103.0 | $ | 164.8 | $ | 216.9 | |
| Revenue-based taxes | 22.6 | 19.8 | 32.9 | 48.5 | |||||
| All-in Costs (including revenue-based taxes) | $ | 126.1 | $ | 122.8 | $ | 197.7 | $ | 265.4 | |
| Ounces sold (000) | 128 | 119 | 190 | 288 | |||||
| Adjusted Operating Costs - $ / oz sold | $ | 512 | $ | 317 | $ | 466 | $ | 280 | |
| All-in Sustaining Costs - $ / oz sold | $ | 768 | $ | 835 | $ | 816 | $ | 717 | |
| All-in Costs - $ / oz sold | $ | 810 | $ | 868 | $ | 869 | $ | 753 | |
| All-in Costs (including revenue-based taxes) - $ /oz sold | $ | 986 | $ | 1,035 | $ | 1,043 | $ | 922 | |
| (1) Results may not add due to rounding |