Centerra Gold First Quarter Results, Net Earnings of $137 million or $0.58 per share (This news release contains forward-looking information that is subject to the risk factors and assumptions set out on page 16 and in our Cautionary Note Regarding Forward-looking Information on page 23. All
NEWS RELEASE
Centerra Gold First Quarter Results, Net Earnings of $137 million or $0.58 per share
(This news release contains forward-looking information that is subject to the risk factors and assumptions set out on page 16 and in our Cautionary Note Regarding Forward-looking Information on page 23. All figures are in United States dollars.)
To view the Management’s Discussion and Analysis and the Financial Statements and Notes for the three months-ended March 31, 2011, please visit the following link:
http://media3.marketwire.com/docs/CGfs_mda.pdf
Conversion to IFRS
As prescribed by the CICA Accounting Standards Board, the Company adopted the requirements of the International Financial Reporting Standards (“IFRS”) in its statements of account as of January 1, 2011, including the restatement of its opening balance sheet of January 1, 2010 and its first quarter 2010 comparatives. The restatement of the Company’s comparative balances from those previously reported under Canadian GAAP standards to those converted to IFRS standards are fully explained and reconciled in note 20 of the Company’s March 31, 2011 condensed consolidated interim financial statements as filed on SEDAR.
Toronto, Canada, April 29, 2011: Centerra Gold Inc. (TSX: CG) today reported net earnings of $136.6 million or $0.58 per share on revenues of $250.2 million compared to earnings of $123.9 million or $0.53 per common share based on revenues of $255.5 million in the same quarter last year.
Consolidated gold production for the first quarter of 2011 totaled 180,716 ounces at a total cash cost of $370 per ounce produced compared to 211,039 ounces at a total cash cost of $340 per ounce produced in the corresponding quarter of 2010. Cash provided by operations, net of working capital changes increased to $142.6 million compared to $82.4 million in the first quarter of 2010. (Total cash cost is a non-GAAP measure and is discussed under “Non-GAAP Measures” in this news release.)
First Quarter Highlights
- Consolidated gold production of 181,000 ounces at a total cash cost of $370 per ounce
- Cash provided by operations of $143 million
- 2011 guidance remains unchanged
1 University Avenue, Suite 1500 Toronto, ON M5J 2P1 tel 416-204-1953 fax 416-204-1954 www.centerragold.com
Commentary
Steve Lang, President and CEO of Centerra Gold said: “I am pleased with our first quarter operational and financial results. We are on track with our 2011 plan and continue to enjoy the benefits of the rising gold price.”
Financial and Operating Summary
Highlights
| Three Months Ended March 31 | |||
|---|---|---|---|
| Financial and Operating Summary | 2011 | 2010 | % Change |
| Revenue - $ millions | 250.2 | 255.5 | (2%) |
| Cost of sales - $ millions (1) | 61.8 | 78.4 | (21%) |
| Net earnings - $ millions | 136.6 | 123.9 | 10% |
| Earnings per common share - $ basic and diluted | 0.58 | 0.53 | 9% |
| Cash provided by operations - $ millions | 142.6 | 82.4 | 73% |
| Capital expenditures - $ millions | 72.1 | 29.2 | 147% |
| Weighted average common shares outstanding - basic (thousands) | 235,880 | 234,857 | 0% |
| Weighted average common shares outstanding - diluted (thousands) | 236,314 | 235,587 | 0% |
| Average gold spot price - $/oz | 1,386 | 1,109 | 25% |
| Average realized gold price - $/oz | 1,385 | 1,112 | 25% |
| Gold sold – ounces | 180,628 | 229,839 | (21%) |
| Cost of sales - $/oz sold (1) | 342 | 341 | 0% |
| Gold produced – ounces | 180,716 | 211,039 | (14%) |
| Total cash cost - $/oz produced(2) (3) | 370 | 340 | 9% |
| Total production cost - $/oz produced(2) (3) | 468 | 442 | 6% |
(1) As a result of the IFRS conversion, cost of sales for 2011 and its comparative year now include depreciation, depletion and amortization related to operations.
(2) Total cash cost and total production cost are non-GAAP measures and are discussed under “Non-GAAP Measures”.
(3) As a result of Kumtor’s Restated Investment Agreement signed in 2009, total cash cost and total production cost per ounce measures for both 2011 and 2010 exclude operating and revenue-based taxes.
Revenues for the first quarter of 2011 were $250.2 million compared to $255.5 million during the same period one year ago. First quarter 2011 revenue reflects a 25% increase in realized gold price ($1,385 per ounce in the first quarter of 2011 versus $1,112 per ounce in the first quarter of 2010) offset by a 21% reduction in ounces sold in the period.
Gold production for the first quarter was 180,716 ounces compared to 211,039 ounces reported in the first quarter of 2010. Gold production was lower at both sites compared to the previous year. At Boroo, gold production was 46% lower in the first quarter of 2011 due to processing lower grade stockpiled material with lower recoveries following the completion of mining operations in 2010.
The heap leach operation at Boroo remained idle during the quarter. At Kumtor, gold production in the first quarter of 2011 exceeded plan as a result of processing higher than anticipated inventory accumulated at the end of the fourth quarter of 2010. At the same time, the gold production was 9% lower than the comparable quarter due to a 5% decrease in tonnes milled combined with a 16% reduction in the average mill head grade.
Centerra’s total cash cost per ounce of gold produced was $370 in the first quarter compared to $340 in the first quarter of 2010. The year-over-year increase in unit cash costs was primarily due to the lower production at both sites (see “Operations Update”). (Total cash cost is a non-GAAP measure and is discussed under “Non-GAAP Measures” in this news release.)
Cash provided by operations was $142.6 million for the first quarter of 2011 compared to $82.4 million for the prior year first quarter. The increase reflects increased earnings and improved changes in working capital in 2011 as compared to the prior year.
Capital expenditures spent and accrued in the first quarter of 2011 amounted to $72.1 million of which $6.8 million was spent on sustaining capital projects. Growth capital totaled $65.3 million which related mainly to the purchase of haul trucks, shovels and drills at Kumtor ($30.4 million), the capitalization of pre-stripping activities ($21.1 million) and the underground development at Kumtor ($10.8 million).
Exploration expenditures for the first quarter were $7.4 million compared to $5.1 million in the first quarter of 2010 reflecting increased drilling activity at Kumtor.
Centerra’s cash and cash equivalents and short-term investments at the end of March 2011 increased to $494.8 million, compared to cash and short-term investments of $413.8 million at December 31, 2010. At March 31, 2011, the Company had no debt outstanding and had an undrawn $150 million revolving credit facility available to it, subject to the satisfaction of certain conditions precedent that were satisfied on April 15, 2011.
Operations Update
| Three Months Ended March 31 | |||
|---|---|---|---|
| Kumtor Operating Results | 2011 | 2010 | % Change |
| Gold sold – ounces | 166,145 | 200,767 | (17%) |
| Revenue - $ millions | 229.9 | 223.3 | 3% |
| Average realized gold price – $/oz | 1,384 | 1,112 | 24% |
| Cost of sales - $ millions (1) | 48.3 | 63.9 | (24%) |
| Cost of sales - $/oz sold (1) | 291 | 318 | (8%) |
| Tonnes mined - 000s | 36,508 | 27,538 | 33% |
| Tonnes ore mined – 000s | 588 | 1,387 | (58%) |
| Average mining grade - g/t (2) | 7.14 | 4.89 | 46% |
| Tonnes milled - 000s | 1,391 | 1,466 | (5%) |
| Average mill head grade - g/t (2) | 4.12 | 4.90 | (16%) |
| Recovery - % | 82.6 | 76.7 | 8% |
| Gold produced – ounces | 164,167 | 180,562 | (9%) |
| Total cash cost - $/oz produced (3) (4) | 342 | 305 | 12% |
| Total production cost - $/oz produced (3) (4) | 434 | 391 | 11% |
| Capital expenditures - $ millions | 71.9 | 23.4 | 207% |
| Boroo Operating Results | |||
| Gold sold – ounces | 14,484 | 29,072 | (50%) |
| Revenue - $ millions | 20.3 | 32.2 | (37%) |
| Average realized gold price - $/oz | 1,399 | 1,106 | 26% |
| Cost of sales - $ millions (1) | 13.5 | 14.5 | (7%) |
| Cost of sales - $/oz sold (1) | 933 | 497 | 88% |
| Total Tonnes mined - 000s | - | 3,094 | (100%) |
| Average mining grade (non heap leach material) - g/t (2) | - | 1.81 | (100%) |
| Tonnes mined heap leach – 000s | - | 778 | (100%) |
| Tonnes ore mined direct mill feed -000s | - | 1,137 | (100%) |
| Tonnes ore milled - 000s | 596 | 624 | (4%) |
| Average mill head grade - g/t (2) | 1.35 | 1.90 | (29%) |
| Recovery - % | 61.3 | 72.8 | (16%) |
| Gold produced – ounces | 16,549 | 30,477 | (46%) |
| Total cash cost - $/oz produced (3) | 645 | 551 | 17% |
| Total production cost - $/oz produced (3) | 805 | 739 | 9% |
| Capital expenditures - $ millions (Boroo) | 0.0 | 0.2 | (92%) |
| Capital expenditures - $ millions (Gatsuurt) | 0.1 | 5.5 | (98%) |
(1) As a result of the IFRS conversion, cost of sales for 2011 and its comparative year now include depreciation, depletion and amortization related to operations.
(2) g/t means grams of gold per tonne.
(3) Total cash cost and total production cost are non-GAAP Measures and are discussed under “Non-GAAP Measures”.
(4) As a result of Kumtor’s Restated Investment Agreement signed in 2009, total cash cost and total production cost per ounce measures for both 2011 and 2010 are shown excluding operating and revenue-based taxes.
Kumtor
At the Kumtor mine in the Kyrgyz Republic, gold production in the first quarter of 2011 exceeded plan due to greater than anticipated gold in-process inventory at the end of the fourth quarter of 2010 which was drawn down in the first quarter of 2011. In addition, the operation processed higher than expected gold grade through the mill with its associated higher than anticipated metallurgical recovery in the quarter.
Gold production was 164,167 ounces in the first quarter of 2011, compared to 180,562 ounces in the same quarter in 2010. Lower mill throughput during the quarter (down 5%) was the result of a fourday shut-down of the mill to change the SAG mill liner. This combined with the mill head grade which averaged 4.12 g/t at a recovery of 82.6% in the first quarter of 2011, compared to 4.90 g/t at a recovery of 76.7% in the same quarter of 2010 resulted in 16,395 fewer ounces of gold production compared to the same period of 2010.
Total cash cost per ounce, a non-GAAP measure of production efficiency, was $342 in the first quarter of 2011 up from $305 in the first quarter of 2010. The quarter-over-quarter increase in unit cash costs was due to 9% lower production and 2% higher cash costs. The total cash costs were $56.1 million in the first quarter of 2011 compared to $55.0 million in the same period of 2010. This reflects higher operating costs of $2.3 million, partially offset by higher by-product revenue from silver sales of $1.1 million. Total cash cost per ounce produced is a non-GAAP measure and is discussed under “Non-GAAP Measures”.
Exploration expenditures totaled $4.1 million for the first quarter of 2011, an increase of $2.3 million from the $1.8 million reported in the first quarter 2010, as a result of increased drilling activity.
Capital expenditures in the first quarter of 2011 totalled $71.9 million compared to $23.4 million in the prior year. Current year expenditures consisted of $6.7 million of sustaining capital, predominantly spent on the heavy duty equipment overhaul program ($5.6 million). Growth capital investment totalled $65.2 million spent mainly on the purchase of CAT 789 haul trucks ($24.0 million), pre-stripping capitalization ($21.1 million), underground development of Decline #1 and Decline #2 ($10.8 million) and the purchase of Liebherr shovels ($5.9 million).
The SB Zone underground decline (Decline #1) has now advanced a total of 1,280 metres, advancing 200 metres in the quarter. Geotechnical drilling continued in the first quarter of 2011. Exploration drilling is planned to resume later this year and delineation drilling of the SB Zone is planned for 2012.
The Stockwork Zone underground decline (Decline #2) has advanced a total of 928 metres (including the second heading, the Stockwork Decline), advancing 194 metres in the quarter. Decline #2 will facilitate the access to the Stockwork Zone and the SB Zone from the north for further exploration and delineation drilling. The Stockwork Decline, established for the exploration and delineation drilling program for the Stockwork Zone, has advanced a total of 270 metres toward the north (95 metres in the first quarter). Exploration drilling continued in the first quarter of 2011 and delineation drilling of the Stockwork Zone resource will start in the second quarter and continue through 2011.
Boroo/Gatsuurt
At the Boroo mine in Mongolia, gold production was 16,549 ounces in the first quarter of 2011 compared to 30,477 ounces in the first quarter of 2010 due to processing lower grade stockpiled material with lower recoveries following the completion of mining operations in 2010. The lower gold production is the result of lower mill head grades and recoveries, 1.35 g/t at 61.3% recovery in the first quarter 2011 versus 1.90 g/t at 72.8% recovery in the first quarter 2010. The heap leach operation remained idle during the first quarter 2011, pending issuance of the final operating permit by the Mongolian Government. The Company continues to work with the Mongolian authorities to obtain the final heap leach operating permit.
Total cash costs per ounce produced, a non-GAAP measure of production efficiency, increased to $645 in the first quarter of 2011 from $551 in the first quarter of 2010 due to the lower gold production which was partially offset by lower operating costs. Operating costs decreased in the quarter by $5.3 million primarily due to a $5.2 million reduction in mining costs as mining operations ceased at the end of November 2010. Total cash cost per ounce produced is a non-GAAP measure and is discussed under “Non-GAAP Measures”.
During the first quarter of 2011, exploration expenditures in Mongolia were $0.9 million down from $1.2 million in the same period of 2010. Capital expenditures for Boroo and Gatsuurt in the first quarter of 2011 were $0.1 million compared to $5.7 million for the same quarter of 2010.
Exploration Update
To view the graphics, maps/drill sections and complete drill results discussed in this news release, please visit the following link: http://file.marketwire.com/release/2011DrillingResults.pdf or visit the Company’s web site at: www.centerragold.com.
Kyrgyz Republic
During the first quarter of 2011, exploration drilling programs continued in the Kumtor Central Pit and the Northeast and Southwest deposits. Regional exploration drilling continued on the Kumtor concession area at the Petrov and Muzdusuu prospects.
Kumtor Pit
In the first quarter of 2011, fourteen drill holes were completed and four holes were in progress at quarter-end. Eleven holes were completed to test both the extent and grade of the northeast extension of the SB Zone towards the Saddle Zone with all holes returning significant results.
Five drill holes were drilled on section 38 and all holes returned significant intercepts, from 50 metres above the KS11 design pit bottom to 100 metres below the design pit bottom. Some of the better results being: Hole D1504A which intersected 2.4 g/t Au over 11.9 metres, 8.6 g/t Au over 38.6 metres, including 18.3 g/t Au over 6.3 metres and 28.8 g/t Au over 3.1 metres and 7.1 g/t Au over 4.9 metres. Hole D1509 intersected 14.0 g/t Au over 23.3 metres, including 30.3 g/t Au over 3.8 metres. Hole D1513 intersected 5.9 g/t Au over 30.0 metres, including 14.3 g/t Au over 6.8 metres and 2.6 g/t Au over 24.6 metres, including 7.0 g/t Au over 5.7 metres. Hole D1520 intersected 4.2 g/t Au over 17.9 metres and 12.1 g/t Au over 93.7 metres, (including 29.2 g/t Au over 5.0 metres, 24.1 g/t Au over 6.0 metres, 27.4 g/t Au over 6.5 metres, 29.5 g/t Au over 5.0 metres) and 10.3 g/t Au over 7.3 metres. Hole D1526 intersected 9.2 g/t Au over 10 metres including 23.4 g/t Au over 3.0 metres.
Hole D1498 on section 42 intersected 5.2 g/t Au over 13.2 metres 4.8 g/t Au over 6.9 metres and 2.9 g/t Au over 13.5 metres, 50 metres below the KS11 design pit bottom. Hole D1491 on section 46 intersected 3.6 g/t Au over 17.4 metres, 2.1 g/t Au over 12.1 metres, 9.4 g/t Au over 12.1 metres and 8.6 g/t Au over 4.6 metres, 50 to 75 metres below the KS11 design pit bottom.
Holes D1507 and D1517 on section 54 both intersected lower grade material, including 2.4 g/t Au over 16.6 metres, 4.8 g/t Au over 6.9 metres and 2.5 g/t Au over 12.0 metres respectively, 50 to 100 metres below the KS11 design pit bottom. The lower grades indicate that the intersections are on the northeastern margin of the SB Zone.
Holes D1496, D1512 and D1525 on section 62 all intersected low grade mineralization, including 2.2 g/t Au over 51.2 metres including 9 g/t Au over 3.0 metres in D1496 and 2.2 g/t Au over 16.1 metres D1525.
Holes D1488A, D1496 and D1506 on sections 34, 62 and 38 respectively, were drilled as wide spaced holes to test for depth extensions of the SB Zone. Hole D1488A intersected 185 metres of low to moderate grade mineralization including 7.8 g/t Au over 4.8 metres and 8.4 g/t Au over 6.7 metres. D1496 intersected low-grade mineralization over 167 metres including 9.0 g/t Au over 3.4 metres. D1506 intersected moderate to high-grade mineralization over 163 metres including 15.8 g/t Au over 15.0 metres. All three holes confirm the continuation of the SB Zone mineralization 300 metres down dip of the KS11 design pit bottom.
Further drilling to test the strike and depth extensions of the SB Zone will continue in the second quarter.
True widths for the mineralized zones are typically from 70% to 95% of the stated intercept.
Decline Exploration
Four underground exploration holes were completed during the first quarter, and one hole was in progress at quarter-end.
Two holes were completed on section 114 in Decline 2 Stockwork Decline to test for extensions of the Stockwork Zone immediately below the KS11 design pit. Hole UD1492 intersected low-grade mineralization over 58 metres including 2.7 g/t Au over 4.1 metres and 2.1 g/t Au over 8.7 metres. UD1495 intersected 2.4 g/t Au over 3.1 metres.
Hole UD1503 drilled on section 118 intersected low-grade mineralization over 70 metres, including 1.3 g/t Au over 12.0 metres. Hole UD1519 drilled on section 122 intersected 3.2 g/t Au over 24 metres, indicating an increase in the grade and width of mineralization on the margin of the known Stockwork high-grade mineralization on section 126.
Exploration drilling will start from Decline 1 to test below Davidoff glacier and also from Decline 2 to test the Saddle Zone in the second quarter as drill access becomes available.
Reserve delineation drilling of the Stockwork Zone will commence in the second quarter.
True widths for the mineralized zones are typically from 40% to 95% of the stated intercept.
Regional Exploration
Regional exploration drilling continued in the first quarter of 2011 with up to five drills completing fourteen holes in the Northeast area, two holes in the Muzdusuu area, two holes in the Southwest area and one hole in the Petrov area.
Northeast Area
Fourteen drill holes were completed during the quarter and a further two holes are in progress at the end of the quarter.
All drilling was designed as 40 metre to 80 metre spaced infill holes to test the mineralized structure within 100 to 200 metres of surface over the known 800 metre strike length of mineralization at the Northeast Prospect.
Some of the better intervals and grades of mineralization intersected in the first quarter include: hole DN1489 4.5 g/t Au over 3.5 metres, DN1501 1.9 g/t Au over 8.3 metres, DN1514 2.6 g/t Au over 10.4 metres and DN1521 3.2 g/t Au over 11.0 metres and 3.0 g/t Au over 5.9 metres.
True widths for the mineralized zones are typically from 70% to 95% of the stated intercept.
A complete listing of the drill results and supporting maps for the Kumtor pit and Northeast area 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 at: www.centerragold.com.
Mongolia
During the first quarter of 2011, exploration work in Eastern Mongolia included field exploration and drilling programs at the Uul Bayan and Western Tuvshinshire properties and the ATO project.
Russia Kara Beldyr Joint Venture
Gord Zone
During the first quarter of 2011, 20 diamond drill holes were completed at the Gord Zone on the Kara Beldyr project. Drilling on a 50 by 50 metre grid continued at the Gord Zone to evaluate resource potential of the prospect.
The following are the most significant intersections, based on available assay results from KB-054 to KB-060:
- KB-054 - 7.2 g/t Au over 16 metres
- KB-055 - 8.6 g/t Au over 3.0 metres
- KB-056 – 4.8 g/t Au over 3.0 metres
- KB-057 - 23.7 g/t Au over 5.5 metres
- KB-059 – 4.9 g/t Au over 4.0 metres, 1.9 g/t Au over 17.0 metres, 13.8 g/t Au over 3.0 metres
- KB-060 – 3.6 g/t Au over 5.0 metres, 2.8 g/t Au over 10 metres
Drilling in the Gord Zone will continue in the second quarter.
A complete listing of the drill results and supporting maps for the Kara Beldyr 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 at: www.centerragold.com.
To view the graphics, maps/drill sections and complete drill results discussed in this news release, please visit the following link: http://file.marketwire.com/release/2011DrillingResults.pdf or visit the Company’s web site at: www.centerragold.com.
Other Corporate Developments
The following is a summary of current matters affecting the Company and its subsidiaries in the Kyrgyz Republic and Mongolia. No material changes have occurred on these matters since the Company’s annual disclosure documents published on February 24, 2011.
Kyrgyz Republic
At the Kumtor project, the Company’s Kyrgyz Republic operating subsidiary pays Kyrgyz Republic Social Fund (“Social Fund”) contributions in respect of the base wages of its national employees. In late 2010, the Social Fund notified the Company of its position that the Company should pay contributions to the Social Fund not only in respect of base wages but also in respect of the premium compensation that the Company is required to pay employees for work at high-altitude. A potential adjustment to the Social Fund contribution for the 2010 year as a result of this matter could require an additional payment ranging from zero to $7.4 million. The position of the Social Fund is inconsistent with its past practices and with prior audits of the Company’s Kyrgyz Republic operating subsidiary, completed as recently as 2009. The Company continues to vigorously dispute the Social Fund’s position. At this time, the liability is unlikely and as a result, no amounts have been accrued in the Company’s financial statements in respect of this matter.
Mongolia
In Mongolia, the Company continued to work with the Minerals Resource Authority of Mongolia (“MRAM”) and the Mongolian General Department of Specialized Inspection (“SSIA”) with respect to several outstanding issues arising from the inspections at the Boroo mine carried out by the SSIA in mid-2009. During the quarter, the Company also worked with the SSIA in relation to the very significant claim for compensation that the Company received from the SSIA in October 2009 regarding state alluvial reserves covered by the Boroo mine licenses. While Centerra cannot give assurances, it believes that settlement of the outstanding matters and the alluvial claim (which the Company disputes) will be concluded through negotiations and will not result in a material impact.
In March 2010, the Company received a letter from MRAM stating that certain of its mining and exploration licenses, including the Gatsuurt mining licenses, could be revoked under the water basin and forestry law which was enacted by the Mongolian Parliament in July 2009 (the “Water and Forest Law”). Under the Water and Forest Law, mineral prospecting, exploration and mining in water basins and forestry areas in Mongolia would be prohibited, and the affected licenses would be revoked. The legislation provides a specific exemption for “mineral deposits of strategic importance”, which would exempt the Boroo mining licenses from the application of the legislation. Centerra’s Gatsuurt licenses and its other exploration license holdings in Mongolia however, are currently not exempt. Under the Minerals Law of Mongolia, Parliament on its own initiative or, on the recommendation of the Government, may designate a mineral deposit as strategic. Such designation could result in Mongolia receiving up to a 34% interest in the deposit. The March 2010 letter requested that the Company provide a preliminary estimate of expenses incurred in relation to each license that could be revoked and the compensation that the Company would expect to receive if such licenses were to be revoked. The Company submitted a detailed estimate to MRAM in March 2010.
In April 2010, the Company received a letter from the Ministry of Mineral Resources and Energy (“MMRE”) indicating that the Gatsuurt licenses were within the area designated, on a preliminary basis, as land where mineral mining is prohibited under the Water and Forest Law, and that the MMRE would communicate with the Company further on negotiations with respect to an investment agreement for the Gatsuurt project once the MMRE received additional clarity on the impact of the Water and Forest Law on the Gatsuurt project.
In November 2010, Mongolia’s cabinet announced its intention to initiate the revocation of 1,782 mineral licenses under the Water and Forest Law on a staged basis, beginning with the revocation of 254 alluvial gold mining licenses. The Company has four licenses (subsequently clarified to be only three licenses) on the list of alluvial gold mining licenses that may be revoked. None of these licenses are material to the Company. In particular, Centerra’s principal Gatsuurt hardrock mining licenses are not on the list of alluvial licenses to be revoked. In accordance with the Water and Forest Law, the Company submitted in February 2011 a formal request for compensation for the three licenses slated to be revoked. The Company has not yet received any further update from the Mongolian regulatory authorities on this matter.
In late 2010, the Mongolian Government announced that it was considering taking the following actions as the next stages of its implementation of the Water and Forest Law:
- preparing and submitting to the cabinet a proposal to designate as “strategic” those deposits, development of which would contribute to regional social and economic development and, at the same time, require significant amounts of compensation;
- revoking all licenses for non-gold mining operations which utilize surface water;
- revoking all 460 gold exploration licenses and providing compensation ;
- revoking all 931 non-gold exploration licenses and providing compensation;
- revoking and providing compensation to all remaining affected mining licenses.
Of the Company’s 55 mineral licenses, 36 licenses (including the Gatsuurt hard rock licenses) are included in the 1,782 licenses referred to in the cabinet announcement as subject to staged revocation.
The Company understands that Mongolia’s cabinet expects that the Water and Forest Law will take until approximately November 2012 to fully implement. According to statements by officials, the Government estimates that the total compensation due to mining companies for the revocation of their licenses will amount to approximately US$4 billion, which is about equal to Mongolia’s annual gross domestic product for 2009.
The Water and Forest Law has attracted opposition from Mongolia’s alluvial miners, the Mongolian National Mining Association and other groups. The Company also understands that a group of parliamentarians has proposed amendments to the Water and Forest Law to reduce its impact on environmentally-sound mining operations. The amendments are expected to be discussed in the spring 2011 session of the Mongolian Parliament.
While the Company has continued to receive permits and approvals in connection with the road construction to Gatsuurt and for construction of surface facilities at the project, in November 2010, the Company received a letter from the MMRE indicating that operations at the Gatsuurt project cannot be commenced while the implementation of the Water and Forest Law is being resolved. Accordingly, it is anticipated that further approvals and regulatory commissioning of Gatsuurt will be delayed as a result of the Water and Forest Law.
Centerra is reasonably confident that the economic and development benefits resulting from its exploration and development activities will ultimately result in the Water and Forest Law having a limited impact on the Company’s Mongolian activities. There can be no assurance, however, that this will be the case. Unless the Water and Forest Law is repealed or amended such that the law no longer applies to the project or Gatsuurt is designated as a “mineral deposit of strategic importance”
that is exempt from the Water and Forest Law, mineral reserves at Gatsuurt may have to be reclassified as mineral resources or eliminated entirely. A revocation of the Company’s mineral licenses, including the Gatsuurt mineral license, could have an adverse impact on Centerra’s future cash flows, earnings, results of operations and financial condition. See “Risk Factors” in the Company’s most recently filed AIF.
New Graduated Royalty Fee
In November 2010, the Mongolian Parliament enacted a graduated royalty tax that applies to all mining projects as of January 1, 2011, including the Gatsuurt project when commissioned and the Ulaan Bulag Prospect. This graduated royalty replaces the previous flat 5% royalty fee on gold. Pursuant to the graduated royalty fee, the royalty rate is tied to the price of gold such that there is a 1% increase in the royalty fee for every $100 increase in the price of gold per ounce above a certain price. In the case of gold, there is a basic 5% royalty fee that applies while gold is less than $900 per ounce. At $900 per ounce the royalty fee increases to 6%, at $1,000 per ounce the royalty is 7%, at $1,100 the royalty is 8%, and at $1,200 the royalty is 9%. The highest royalty fee rate is reached at 10% at $1,300 per ounce and above. For example an ounce of gold sold at $1,000 per ounce would be subject to a royalty of 7% or $70.
The graduated royalty became effective as of January 1, 2011 for all mining projects in Mongolia. On January 19, 2011, the Standing Committee of the State Great Hural of Mongolia issued a resolution to the Government which, among other things, resolved to direct the Government to enter into negotiations to have the graduated royalty structure apply to business entities that have already entered into a stability and/or an investment agreement. This would include the Company’s Boroo mine which is currently operating pursuant to a stability agreement entered with the Mongolian government. To date, the Company has not received any further word regarding this resolution and whether the Government will act on it. In any event, the Company is of the opinion that the Boroo stability agreement provides, among other things, legislative stabilization for its Boroo operations and accordingly the graduated royalty fee is not applicable to Boroo’s remaining operations. However, the Company cannot provide any guarantees that Boroo will not be made subject to the graduated royalty fee. If the graduated royalty fee does apply, it may have an adverse impact on Centerra’s future cash flows, earnings, results of operations or financial condition. Regardless of whether the graduated royalty fee applies to the Boroo operation, it will apply to gold produced from the Gatsuurt mine, when developed.
See “Risk Factors” in the Company’s most recently filed AIF, available on SEDAR at www.sedar.com and see also the discussion below under the heading “Cautionary Note Regarding Forward-looking Information”.
Outlook for 2011
Centerra's 2011 consolidated gold production is forecast to be 600,000 to 650,000 ounces. Total cash cost in 2011 is expected to be $460 to $495 per ounce produced. Both production and cash cost guidance are unchanged from the prior guidance disclosed in the Company's news release of